Balancing Between Investing in Your Business and Saving for Retirement

Kem: The goal is to have a successful business. I just want a business plan and a business budget that doesn't start to somehow bleed past what's allocated, and now I'm just churning my personal money into it. You know, I just don't want to find myself bailing water out of a leaky boat.

Jean: Hi everyone. I'm Jean Chatzky, and you're listening to AARP’s Closing the Savings Gap, brought to you by Fidelity Investments. You might have seen me on the Today Show or listened to the HerMoney podcast. I'm also proud to be AARP's Financial Ambassador.  On the next seven episodes, we'll be talking to real women as they work to close the financial gap holding us back in retirement. This is the gap between the income we're on track to draw from our savings and social security, and the amount we're going to have to spend on essentials like groceries, healthcare, and housing. It can be a big gap, especially for women who earn just eighty cents on the dollar compared to men. By age 60, we've earned a whopping $1,000,000 less than our male counterparts on average, and then, because we live a half decade longer, we have to figure out a way to make that money last. Closing the gap may sound daunting, but it is not impossible. Over the course of this series, you'll meet women who have a retirement gap because of a common financial roadblock. It could be debt, overspending, undersaving, lack of confidence when it comes to investing. Don't be surprised if some of these stories sound familiar. My team has matched each of these women up with a financial planner who's taking them by the hand and helping them make the changes they need to retire with confidence, and so that you can do the same.

Jean: On this episode, we're going to be looking at a common problem. How many of you have access to 401(k)s through your jobs? Well, more than a third of private sector workers – thirty five percent – do not. Entrepreneurs and people who work at smaller companies are even less likely to have a plan, and of course, retirement is never the only responsibility on our plates. While Kem, a 44 year old married mother of a 16 year old son who is just launching her own firm is trying to make sure she has enough for retirement, she's also dealing with the upcoming cost of college for her son. And still paying off some of her own student loan debt. That sounds surprising, but she's not the only one. Welcome, Kem.

Kem: Thank you for having me, Jean.

Jean: So you are coming to us from down south in Birmingham, Alabama.

Kem: Yes.

Jean: Lovely town. I have not been there myself, but my husband has been there a couple of times and he just loves it. Tell us a little bit about you. I know that you recently made a big change in your career.

Kem: Yes, for several years I worked as an attorney all the way up from the associate level to the partner level, which is part ownership in the firm, and then, like many attorneys do, I made the jump from outside counsel to inside counsel, representing one of what had been my bigger clients at the law firm. And so I had a five year contract that they opted to buy out in three years, and that left me with a good severance and a nest egg to rebuild and start in a different direction.

Jean: And you decided at that point that you're going to do your own thing, you're gonna start your own firm?

Kem: I did. I figured that that was the one way to, going forward, calling my own shots and creating my own opportunities and not to be at the mercy of the system. But at the same time, that was the first time being left without ongoing income security under the corporate umbrella. But I just wanted to test myself and get out there and just see if I could secure my own future.

Jean: It's a challenge, but I think it's a really exciting one, having done something similar to that myself. Tell us a little bit about how you're set up for retirement, but also how you're planning for college. How much have you saved and how much do you think you'll need?

Kem: Quite frankly, I haven't done much calculating in terms of what I will need. Right now, in terms of retirement, I have about $150,000, and then, you know, I'm still of working age and have several decades left of work. And so absent this new direction, I would have been plugged into a corporate system, and I could have increased my deposits into retirement over the course of the next 30 years. And so that's the thing that, again, makes me apprehensive about retirement. Because I've started something and I feel like I have a good start, and I'd like to continue, but I'm continuing with far less certainty.

Jean: You've also got a significant chunk of money saved for college, about $175,000, which is a tremendous head start, but at the same time you've got a bunch of debt – mortgage debt and student loan debt of your own.

Kem: Before, I felt completely comfortable managing those things with the level of income that I had, but now that's been completely thrust into a zone of uncertainty that makes me anxious, because I don't have the security of just having a job or a contract to where that money is going in automatically, paid for by someone else and I just show up to work and it's there.

Jean: I feel ya. Boy, oh boy, do I feel ya. And this is the perfect time for you to sit down with a financial planner and actually make some decisions about how to allocate your resources, because you're right, you do have great earning potential, but at the same time you're entering a phase of life and a phase of business where it's on you to provide money for the retirement plan and on you to provide your own salary. So you need to take a conservative look at that and see how it's gonna shake out.

Kem: Well, I certainly appreciate any assistance that I can get. I mean, the issues and challenges really have the potential to keep you up at night.

Jean: Are you losing sleep?

Kem: Not losing sleep in a way that is troublesome, but losing sleep in a way that my mind is churning on ways to make the business venture successful, and ways to generate revenue and ways to keep everything on track. And so it's a good loss of sleep. It's the same type of thing if I were involved in a big case, but nonetheless, you know, there's just anxiety involved with it.

Jean: The other challenge that comes along with being your own boss and running your own business is income that may fluctuate. When you get a paycheck that comes twice a month by direct deposit, that's something that you can count on. And when you're paying yourself, it may ebb and flow a little bit. Have you worked out a budget?

Kem: I've certainly taken steps to scale back and be cost-conscious, but in terms of, you know, a spreadsheet with an actual budget I just haven't gotten that far, which is why this is so timely.

Jean: Yeah, absolutely. Well, I think that we are going to be able to get you a lot of answers and a lot of direction, and I'm looking forward to introducing you to your financial planner.

Kem: Well, thanks again so much for allowing me to participate, and I look forward to meeting someone and getting some answers and getting some help and easing my mind.

Jean: My team and I were so excited to pair Kem with certified financial planner, Cary Carbonaro. Cary has more than 25 years of experience in financial services, an MBA in finance, and I'm most excited about this – she is author of the book The Money Queens Guide for Women Who Want to Build Wealth and Banish Fear. She is a passionate female advocate and champion of financial literacy, and is a managing director and partner at United Capital in Orlando. Cary, welcome.

Cary: Thank you for having me!

Jean: Well, thank you for doing this with us. Tell us from the very beginning what the math looked like for Kem. What kind of a retirement gap was she looking at?

Cary: In order for her to be able to fund her current lifestyle, she needed $2.5 million by 65, which is 20 years, so in order for her to do that, she needs to take social security at 70, and no sooner because she needs the extra time. Second, she needs to save $2,500 a month starting now and invest it in a 70/30 portfolio. So she's got 20 years of saving $2,500 a month to catch up.

Jean: So let's break down these steps because each of those in and of themselves is fairly difficult. So the first thing that you said she had to do with saving $2,500 a month and putting that away and putting it to work. So let's break that down. Where's that money gonna come from? She sounds to me like somebody who has been spending up to her level of income.

Cary: Well it will come from her income, I hope, from her new clients, from going out on her own. But she does still have that big nest egg that she got from her pay out of her old job, and so she can take it from there if she wants, save it from that pool of money.

Jean: You also said she needs to delay social security until age 70. This is a recommendation that a lot of people receive. What's the benefit of it, and why does it work for her?

Cary: If she waits till 70, she gets that eight percent increase every year, which she needs to close her gap. The best way to look at it is from full retirement on, every year you wait is an eight percent increase.

Jean: So that's a guaranteed return that's tough to beat in any other way. Now that Kem is on her own, is working for herself, where will she be putting this retirement money?

Cary: Okay. So she actually has a ton of options as a solo entrepreneur. She's got a simple IRA, a regular IRA, a Roth IRA, a solo 401(k) or a SEP. My favorite of all of these is the solo 401(k) if it's just her working, because she can put up to $61,000 in there once she's over 50.

Jean: That's incredible.

Cary: That's a lot of money.

Jean: So the key there is not putting it into the college account for her son, but putting it into the retirement account for herself?

Cary: Yes, yes.

Jean: And you mentioned a 70/30 portfolio, 70 percent in stocks, 30 percent in bonds. Why that split?

Cary: I just want her to be in the safety zone, or in the "okay zone" so to speak. So if she went to an 80/20, it might not be worth the risk for her.

Jean: So basically we are playing the odds – and playing is a terrible word to use here – but we're sort of tiptoeing around the odds to make sure that our money lasts as long as we do.

Cary: Exactly. Well, you remember, especially for a woman, we live so long. And you know, if she retires at 65, she could be living to 100. She could be retired longer than she actually worked. And so we need our money to grow. We need to outpace inflation, and we need it to be invested in the market, because that's the only way we're going to get that kind of growth.

Jean: Absolutely. Cary, tell me a little bit about the plan you put Kem onto repay her student loans.

Cary: So I told her to pay them off as soon as possible, potentially using some of the money that she got for her settlement. I want them paid off immediately, if not sooner.

Jean: Do you have a rough general dollar amount that she'll be paying each month?

Cary: I would like Kem to pay $1,000 a month towards her student loans, but of course that depends on her income and cash flow, because we don't know yet what she'll have coming in monthly from her new business. If she could put more than $1,000 towards the loans without compromising the $2,500 I suggested for her retirement savings, that would be perfect.

Jean: Are you hopeful that she will succeed on this plan?

Cary: Yes. I am so hopeful because you know what? She's smart and she's motivated, and it was very eye-opening I think for her, and I'm hoping that I close her gap for sure, and she's going to do everything I tell her to do.

Jean: We've heard that again and again in this series that it's just been eye-opening that people who haven't paid attention are finally looking at what the actual situation is and there's so much surprise.

Cary: I think for women to have an objective third party looking at their information and giving them objective advice is super important, because who else are they going to turn to? How are they going to evaluate how they're doing?  How do they know what they're doing is the right thing? You know, everybody needs professional advice when it comes to their money, and the sooner the better as far as I'm concerned. If you think about it, to me, I think you know, if you fail to plan, you plan to fail. So it's a simple saying, but if it's something in writing in front of you that you can see and it's tangible and you can touch it and feel it, I think it makes it so much more real.

Jean: That is so true, Cary. Everybody needs this sort of guidance and having it in front of you on paper, that makes all the difference. Cary Carbonaro, thank you so much.

Cary: You're welcome!

Jean: So it's been a few weeks since Kem and Cary met, and now we're checking back in with Kem to see how she's doing with her new financial plan. Kem, bring us up to date with what you've learned and how you're doing since we last spoke.

Kem: Jean, I'm so glad to be here and I have such a positive outlook. I have such renewed insight as to where I have been, and such a better outlook of where I'm going financially. And so Cary and I have met, I've read her book. She had me fill out a lot of different paperwork about my finances and my budgeting, and the process of having gone through that has really helped me in terms of accountability on one hand – just seeing your actual practices and thoughts on paper. And then also the accountability aspect of the time sensitivity of getting things back to her makes me have to focus in areas where otherwise I might have let things linger on without really having a plan.

Jean: You mentioned that just writing things down was a big change. I often, when I take people through the process of trying to budget for the first time just to have them go through and write where the money is going, it's completely eye-opening.

Kem: It absolutely is.

Jean: One of the things that she focused on was your own retirement. You've had more saved or you have more saved for college for your lovely son than you do for retirement. How did that resonate with you?

Kem: I knew that I was putting money away for him. Had I mentally affirmatively taken stock of the fact that I was prioritizing his college over my retirement? I just hadn't thought it out in that way, although I knew exactly what I was doing. What I learned is that I do have more of a 'put others first' financial mentality, and so that's been new.

Jean: That's called being a mother. (Laughs)

Kem: Yes.

Jean: Of the changes that Cary suggested to you, are there any that you think you're going to find difficult?

Kem: Yes, there are a couple. One was to stop investing in the college plan. I felt like, okay, well there's a potential that I might run short, and I just need to use this time up until the last minute to invest in it, and so she said to stop investing in the 529 and divert some of that to my retirement. And it's a relief hearing that from a financial professional, because then that just eases my mind that I'm okay, and it's okay to do that.

Jean: Tell me about your student loans. I know that Cary suggested that you prioritize re-paying those loans. How much student loan debt are you looking at?

Kem: About $55,000.  It may be slightly more, give or take.

Jean: That's a significant amount.

Kem: It is.

Jean: What's your strategy now for getting out of those quickly?

Kem: Well, the strategy is to pay more than what's required. The easiest way to get ahead of it is to pay more than what's required, and so at every opportunity I intend to pay more.

Jean: Because the goal is to get you to retirement where you don't have debt yourself.

Kem: That's exactly the goal.

Jean: How was the whole experience of working with an advisor? This was your first time, right?

Kem: It was. I really liked the accountability of it all, and I liked the comfort of knowing that I wasn't making decisions in a vacuum, because again, you know, everyone has their cabinet of advisors: my husband, my parents, even my son Copeland. But just the idea that someone professional with a financial background who is an expert in their field is guiding some of these saying either, yay or nay. Yes, you're headed in the right direction here, but what were you thinking with the other thing? And so that level of accountability has been helpful to me.

Jean: As you look forward long term, do you think this plan sets you up to be in a better position for retirement, and to actually close that retirement gap that you were looking at?

Kem: I think it absolutely does. I feel, like I said, the relief to prioritize my own retirement. The other side of it though is that I don't feel that it will stop here. I intend to remain engaged with financial professionals based on how helpful that it's been.

Jean: How do you feel overall? I mean, coming into this, I know you a little nervous and a little unsure. How do you feel coming out the other side?

Kem: I feel like I could do cartwheels quite honestly, because with Cary in particular, she's been through a lot of what I'm going through and so her advice was keenly on point and it also made me aware of some of the pitfalls, where, if you're prepared for them you can better plan. And so you know, you always plan to be profitable, but you need to spend is if you're not going to be.

Jean: So she gave you some business budgeting tips?

Kem: She did! And that that's helpful. For example, to rent out the portion of my building that I'm not going to use for my own personal office space. And the rest of the building, section it off, rent it out and share space in order to have a separate pool of resources that are not going to waste. And again, budgeting every penny to make sure that you do well.

Jean: Well thank you so much for going on this journey with us and for sharing your story. We really appreciate it.

Jean: Let's quickly go over the steps that Kem will be taking to close her gap. First, when it comes to her budgeting, she is writing everything down. That's an eyeopener. She's prioritizing her own retirement savings over her son's college savings. She'll be paying down student loan debt, and she'll also focus on saving for retirement now that she no longer has an employer plan. We are so grateful to Kem and Cary for sharing this journey with us today. And we're thankful to all of you for joining us for this episode of Closing the Savings Gap. Our goal in all of this is to make sure you close your personal retirement gap so that you have enough not just to survive in retirement but to actually enjoy it. And for those of you who have enjoyed this program, I'd love to suggest that you check out my weekly podcast, HerMoney with Jean Chatzky.  It is our continuing conversation on money and life — and life and money — for women of all ages. For now, please tune in to the next episode of Closing the Savings Gap, and join us at AARP.org/closingthegap to find episodes, stories, and more great content. Hope to see you there and we'll talk soon.

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