6 Steps Toward Financial Literacy: Thoughts with Andrew Rotz

Disclaimer: The information below is merely to educate you on personal finance and retirement. This does not constitute investment advice. Retirement investing is a personal process and will differ from one individual to the next. 

Andrew Rotz is a Certified Financial Planner at the College of Veterinary Medicine. Recently, he spoke with some NC State Postdocs answering questions they had regarding personal finance.

1. Create a Budget to Track Income & Expenses

The first step to understanding your finances is developing a budget. You need to track your income and expenses to understand a few things:

1. Where does my money go?
2. How is my money allocated (% toward food, rent/home, retirement)?
3. Do I want to change how my money is allocated (so I can save more, reduce certain expenses, etc)?
4. Do my spending habits match my personal financial values and priorities?

While there are many budgeting tools out there (YNAB, Mint.com, etc), you really just need an excel spreadsheet or other template to get started.

The importance of a budget cannot be underestimated as you need to know how much money you can safely devote to your savings goals or retirement while still paying your bills.

Also, remember a budget is a living document and its details will fluctuate and change over time.

A good general rule regarding budgeting is the 50:30:20 rule where your net income (income after taxes) is allocated:

• 50%: Needs (housing, food, utilities, transportation, healthcare premiums)
• 30%: Wants (shopping or dining out)
• 20%: Savings

2. Set a Savings Goal

A 20% savings goal would be awesome but sometimes it’s not feasible if your other expenses are high. Maybe you live in a high rent area or are still paying off student loans. Andrew suggested to those in attendance that if they can save 15% of their pre-tax salary each year, they should be in good shape for retirement.

Ultimately, though, how much you need to save for retirement depends on what you want your lifestyle to look like in retirement and your progress thus far.

3. Save Early, Often, and Let it Grow!

The importance of saving early and often for retirement and other long term goals cannot be understated. Even a little saving goes a long way thanks to the power of compound interest which Einstein reportedly called the 8th wonder of the world. To illustrate the point, let’s use a compound interest calculator.

• If you are a postdoc making $47,000/year and contribute 15% of your pre-tax income into a savings account, that amounts to $7,050/year (or $587.5/month).
• Sound like too much to be saving? Ok, what if you saved $200/month (~5.1% of your pre-tax income).
• If you continually saved that amount every year ($200/month, $2,400/year) for 30 years and never increased your contributions (which is unlikely given your salary will rise in the future), and put it into an S&P 500 Index Fund (more on this later), which has averaged an 8% return since 1957, you would have $271,879.71 in savings. Amazing, right?

The key to realizing returns in your savings is to stay the course and continually invest. There will be fluctuations in returns, especially those tied to the Stock Market, but over the long-term, economic growth continues and the Market moves higher.

4. Understanding How to Develop a Savings Plan

There are three key points to consider when you are saving money:

1. Time horizon (When will you need to access these savings? Are they for a particular goal?)
2. Risk tolerance (How much risk do you want to take when investing your money to grow? How much fluctuations in a given period of time are you comfortable with?)
3. Skill (Do you want to be actively involved in managing your money? Set it on autopilot?)

First, the Time Horizon

The Time Horizon when you may need to access your savings will affect where you save your money.

For example, everyone should have an emergency fund with money to cover ~6 months of expenses (which you will get from your budget, above). This money should be saved in a readily accessible savings or money market account through a bank. You won’t earn much interest but your money will be easily accessible when needed.

If your time horizon is retirement 30 years from now, you can put it into investments that return more than a savings account on average (like an S&P 500 Index Fund). Fluctuations in the Stock Market, though, means the value of these savings will change (sometimes violently) over time. Over the long-term, though, your money should grow.

Next, the Risk Tolerance

This will vary from individual to individual but typically potential returns and risk level are anti-correlated….the greater the risk, the greater the potential returns (or loss). Risk is high with an individual stock, lower with an index fund, lower with bonds, and lower still with a savings account.

Finally, Skill!

In terms of your investment Skill, you can be actively involved in managing your investments or take a passive, index-fund approach. Target Date Funds require the least amount of skill/intervention as the fund will adjust its asset allocation over time and become more conservative as you approach retirement. In contrast, holding individual stocks requires the most amount of skill/involvement on your part to identify what to buy, when to buy it, and when/why to sell it.

5. Know Your Investment Options (NC State Postdocs Edition)

NC State postdocs whose pay is subject to FICA taxes (postdoc fellows paid directly by the fellowship sponsor may not be eligible) can participate in the voluntary/supplemental retirement plans available through the UNC System. From the NC State benefits website, you can download the UNC System Supplemental Retirement Plan 2020 Decision Guide (scroll to bottom of the page and click the button to access the PDF). This will detail your retirement plan options. You can open 403(b) or 457(b) plans through Fidelity or TIAA and each offers slightly different investment options.

Fidelity offers a cool “BrokerageLink” feature. This allows you to take more control of your investments and choose options beyond the Target Date Funds and Core Lineup within the UNC System Plan.

The Core Lineup has many great options, though, including Bond Funds, US Stock Funds, and International Stock Funds. The Vanguard Institutional Index Fund (VIIIX) option, for instance mirrors the S&P 500 Index that was discussed earlier and this fund is available through both Fidelity & TIAA.

Target Date Funds are quite popular retirement investment options as their asset allocation becomes more conservative as you approach your target retirement date and both Fidelity & TIAA offer several target date options depending on the year you expect to retire.

6. Learn about Roth vs Traditional 403(b) Retirement Plans

Your UNC System 403(b) retirement plan can be opened as a traditional or Roth plan. What does this mean? A Roth 403(b) (or other retirement vehicle like a 401(k)) deposits funds post-tax. Thus, you have already paid taxes on the funds you contribute to a Roth. In a traditional 403(b) (or other retirement vehicle) the contribution is pre-tax meaning you don’t pay taxes on your contribution going in but will when you withdraw funds from the account at retirement.

Typically, contributing to a Roth account makes sense when you are in a lower tax bracket now than you anticipate being in in the future. In addition, some would argue that future tax brackets and tax laws are unknown.

So, perhaps better to pay taxes now in a Roth account than face the unknown taxes when you withdraw your savings from a traditional retirement account.

As long as you abide by a few rules with Roth money (like being 59.5 years old when you withdraw growth on your investment), the money you take out to pay expenses in retirement is tax-free. You can take out the dollar amount you contributed to a Roth retirement vehicle at any time, though, since you’ve already paid taxes on it.

Also, there are options for both traditional or Roth retirement savings to be withdrawn for the purchase of your first home without paying a tax penalty. Whether you should do this or not, though, is an individual decision.

Major Discussion Take-Away Points

• Start tracking your income and expenses and build yourself a budget.
• Don’t wait to start investing in your retirement….compound interest is a powerful thing and the more time you have to take advantage of it, the better.
• A Roth retirement account may make more sense for you when you think your tax bracket will be higher in the future and/or if you would rather pay certain tax now versus uncertain tax in the future.

In closing, financial literacy is critical to setting yourself up for a happy retirement and accomplishing other goals like buying a house, traveling, etc. Fortunately, becoming financially literate has never been easier with the plethora of online tools and resources available.

So, what are you waiting for? Take charge of your finances and secure your financial future now.

Online Resources

• XY Planning Network
  • Personal Finance Blog
• Nerdwallet (variety of topics from credit cards to savings to mortgages)
• The Motley Fool (investment/retirement info)
  • The Ascent (personal finance)
• Investopedia (look up a variety of finance terms, and more)
• Fidelity Learning Center
  • Investing for Beginners YouTube Channel