Join us for an insightful journey with Al Smith on Retirement Unpacked as he delves into the common concerns seniors face in retirement and how to plan for a secure future. Al connects the rich history of the Studebaker family, known for their iconic wagon-making business, to modern-day financial planning. The remarkable story of Studebaker’s growth from a small family business to a leading automobile manufacturer provides valuable lessons on corporate success and personal finance. In this episode, we explore how past corporate decisions on pensions influenced landmark legislation like the ERISA Act, which now ensures transparency and security
Welcome to Retirement Unpacked with Al Smith, owner of Golden Eagle Financial. You want a retirement plan that alleviates your fears about the future so you know your money will last. As a chartered financial consultant, Al Smith will help you find a balance between the risk and reward of the market and the safety of your retirement income. And now, here’s your host, Al Smith.
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Welcome to another program of Retirement Unpacked. I appreciate you listening. I’m sure there’s other things that you could be doing. Even if you’re in the car, there’s lots of other radio stations, but I’m glad you’re tuned in to KLZ, listening to some concepts and ideas about money and retirement that hopefully they will be useful and interesting to you. Not long ago, a few weeks ago, I did a show on what people described as their primary concerns. These were described to me sometimes in emails, but usually in face-to-face conversations when people come into my office for a consultation or if they’re already clients for a review, which we do periodically, or if they’re a client who’s coming in for some particular reason and we dive into what their concerns are. And I wanted to make it clear to everyone who’s listening that nearly everyone, if they’re thinking in terms of wealth accumulation or saving for retirement or just accumulating a nest egg, nearly everyone has some kind of concerns. Sometimes those have to do with market volatility. Sometimes those have to do with cash. Taxation, how can I structure my retirement where I am paying less in taxes. So a lot of people have concerns and these are often things that I address when we ultimately have a conversation. I wanted to make it real clear to everyone out there who is listening to feel free to give my office a call 303-744-1128 and we can talk about your concerns over the phone. and we can schedule a follow-up time where you can come into the office. If you’re working, a lot of times I will have meetings, oh, anywhere from 4.30 to 6 o’clock when people are off of work, because when you’re working, you don’t need to take time off to see me like I’m a a chiropractor or a surgeon or something i work at other people’s convenience but in any event to address your concerns by all means give my office a call Today we’re going to be talking about initially a family of immigrants. Their names are Henry, Clement, John, Peter, and Jacob. They came to this country in 1736 at the port of Philadelphia. The primary person was Peter and his wife, Anna Margarita. They were on one of the old manuscripts in the Philadelphia State Library. So they came here in 1736. And Peter Studebaker, along with others of his family members, began very early making a wagon factory way back before our country was even a country. It was built the next year after they moved and built a home. And Peter was master of what’s called the German factory. Cutler Guild they built the first Studebaker home as well as the first wagons so they began building their trade in the 1700s and they continued to do that they had trade secrets that were passed on from father to son generation to generation they had a family business plan that in included purchasing, again and again, amounts of land. They built industrial farms with mills and wagon-making factories and so forth. And they did these in other locations, identical to the Baker’s Lookout, which was their very first one that they had built. And essentially, their story is the story of a family business, which in its microcosm is the story of industrial development in the United States. And those of you who are older are familiar with the name Studebaker. They began building… uh their actual studebaker company that began building the wagons was um you know first uh incorporated back in i believe it was the 1856 or something like that i’m sorry 1852 and then it was incorporated in 1868. It was called the Studebaker Brothers Manufacturing Company. And obviously they weren’t building automobiles at that time, but they were building wagons, coach builders they were called. They entered the automotive business in 1902, initially with electric vehicles. I bet you were not aware electric vehicles were made back in 1902. 1904, they began with gasoline vehicles sold under the name Studebaker Automobile Company. In 1911, its automotive division operated in partnership with Garford Company of Elyria, Ohio, and also the Flanders Automotive Company, the first gasoline automobiles to be fully manufactured by Studebaker were marketed in 1912. Over the next 50 years, the company established a true reputation of quality, durability, and reliability. What many of you who are younger, and most people out there are younger to some degree, you may not be aware that Studebaker at one time was the largest car company in the United States. And I think we would have to pin that down to probably in the 1950s because my research didn’t narrow down the time. But to give you some idea, between 1909 and 1910, they were building between 8,000 and 15,000 vehicles. vehicles. By 1920, it was 51,000 vehicles. By 1924, 110,000. And their peak was right around 1950 when they built a quarter million vehicles. And I think this may have been about the peak of at the time when they were the largest car company in the United States. And they were known for innovative styling. If you’ve ever seen pictures of older Studebakers, they’re very different looking from many of the other vehicles that are around at the present time. And also, later on, even after they quit the basic manufacturing, there were other vehicles that came out. One is called the LARC. 1953, they had one called the Commander. 49, there was one called the Champion, a four-door sedan. In 1960, there was a Studebaker Lark. And their primary factory, which was in Indiana, closed down in 1954. And they also had a merger with Packard. Now, Studebaker made tremendous vehicles. They had styling, innovation, engineering, and everything, but they were poorly run. And when they had the merger with Packard, Packard, although it was a smaller company, they were more financially sound, and they were unaware at the time of the merger that Studebaker was having financial difficulties. And in spite of… you know, great growth in the past, some of those financial difficulties ended up causing them some serious, serious problems. And those problems began to occur in the late 50s. And at the time the Indiana plant was closed, there were about 4,000 workers who were laid off without any notice at all. And also, their pensions were either denied or radically reduced. And this was incredibly devastating, especially to a company who was so incredibly successful. But they were thinking only in terms of greed or whatever you want to call it, not the welfare of the workers. Because back then, before the passage of ERISA, which is a law that I’m not going to dive into too far, there were no requirements for companies that offered pensions to disclose any of their financial circumstances to their employees. And it was not illegal for pensions to just be eliminated or revoked. There was no requirement for transparency of any kind back there. So although Studebaker represents an amazing situation or an amazing story of economic growth from immigrants to making wagons to… making from 10,000 to over a quarter million vehicles from being the largest car company in the United States to, you know, treating their workers terribly, denying them their pensions, and so forth. And you’re probably wondering, is this a financial show or is this a Well, I find the circumstances and everything behind Studebaker, it was largely an impetus for the ERISA Act. And what the ERISA Act, it required companies that were providing pensions to provide full disclosure. um pensions couldn’t be denied pensions had to be vested after certain periods and it also required companies to participate in the pension benefit guarantee corporation which is similar to the sipc but it has to do with pensions rather than savings in the banks Now when many, many companies back then had pensions, for example, in 1983, which is way beyond Studebaker, there were 7.1 million people who had pensions. Well, that number is wrong. That number refers to 401ks. But we’ll dive more into the death of pensions and the birth of the 401k after the break.
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SPEAKER 01 :
Welcome back to the second half of Retirement Unpacked. We were talking about the Studebaker Company and how many of their employees were denied their pensions. But before I go too far into that to give you some idea of how extravagant and wealthy and successful Studebaker Studebaker was they had their own proving grounds. You know, you’ve heard of like the salt flats of Utah and so forth. Well, they had a grove of 5000 trees in this proving ground and they can actually and those 5000 trees were trimmed to spell out the word salt. studebaker and they were planted way back in 1937 and they have been kept in spite of the fact the studebaker company is no longer around the name still has some meaning and it costs to use that name but you can go on to google earth and asked to see the Studebaker proving grounds and you can see them from satellite that those 5,000 trees spell out the word Studebaker. But what we were talking about, the reason we were talking so much about Studebaker is its demise and why 4,000 people were denied their pension benefits was largely a result of the employment retirement income and security act ERISA passed in 1974 that required pensions to be their financial circumstances of the company to be transparent to be disclosed and they also had to participate in the pension benefit guarantee corporation and as a result Way back in 1980, there were 38% of people participating in pensions, and by 2008, that dropped to 20% because it’s much more expensive for companies to provide pensions, much more expensive. The onus of the success of the retirement plan is on the employer rather than the employee. And in 1978, with the Revenue Act, and a gentleman named Ted Benna, who was a financial person, he was a financial consultant, and he recommended to a particular company, after the passage of this Revenue Act, that permitted companies to begin 401ks, although none had done it. But Ted Benna is largely responsible for that. And to give you some idea, the growth of 401ks, 1983, 7 million people were participating in them. Shortly thereafter, there were 39 million. And by 2019, there are now 80 million participants in pensions, and there are approximately 5.7 trillion in pension assets. So 401ks have grown considerably with the demise of the pension. There are still companies that have pensions. Federal government, much of the… Folks who have pensions are either government or very big companies. Right now, for example, Xcel Energy has pensions. Other than that, most people I know who have pensions are government workers. The federal government, for example, used to have civil service. And in the 1980s, they morphed that into what they call FERS, Federal Employee Retirement Program, or Retirement Service. And that is when they also required federal employees to begin participating in Social Security. So pensions are still out there, but they are much larger. rarer than they used to be. So there is clearly a transition from pensions to 401ks, which puts the onus on the back of the employer. Let me take that back. Pensions puts the onus of the retirement on the employer. 401ks puts the onus on the employee. Pensions are paid for every employee. 401ks are optional. People don’t have to participate in 401ks. I would say they’re foolish if they don’t, at least to the level of matching. But that’s why right now there’s 80 million people participating in 401ks. And there have also been some laws that have loosened up some of the provisions in 401ks. For example, There is a catch-up provision where people who are older can put substantially more money into their 401ks, and it’s a far greater amount than you can put in IRAs. It’s in excess of $20,000 per year. And so that’s something to really be considering. Now, I recently saw a financial article that pointed out that there are some big advantages to 401ks over IRAs. And I don’t believe it’s an either-or situation. One of the advantages of IRAs is… People may not have a Roth option in their 401k plan. Most of them do now, but not all of them. And so with IRAs, you can do a traditional IRA or a Roth. Now, there are income limitations to doing a traditional or to doing a Roth IRA. You can’t do that if your income exceeds a certain amount and if you’re covered under an employee plan. But what one can do is what’s called a backdoor Roth, where you put money into a traditional IRA and then convert it. Now, on the other hand, 401ks also have some other opportunities. You can borrow money from your 401k, assuming that it’s permitted in the master document. In other words, when a 401k is established, the employer has to create a document that includes all of the basic rules. And there are usually rules that employees can borrow from their 401k. And if they leave the company, then that will be treated as distribution and taxed and so forth. But sometimes people ask, well, should I max out and put a lot more money my 401k beyond the level of matching well at that point i wouldn’t say yes or no the answer to that question is it depends in other words if you are already putting into your 401k whatever level your employer matches putting it in beyond that i would also look at what are the other alternatives you could open up a taxable account a regular investment account that is not part of a 401k now one of the advantages of that is if you needed money for some particular purpose that’s just like money in the bank you can take it out whenever you need it now it would be a taxable account which means that dividends and capital gains would be taxed you would get a statement each year Most of my clients, their accounts are through Charles Schwab. They would get a statement each year about the taxable nature of their taxable account. In the case of Charles Schwab, they call it a Schwab One account. Now, for most people, unless they have significantly high income, capital gains are either at a zero rate or a 15% rate. which for most people is lower than your regular tax rate. So having a taxable account, there are a lot of advantages to it. Some other advantages, and this would also include some of the things that are available in IRAs, people’s 401ks, now many of them have a lot of choices. Outside of the 401k, you can have an account that’s extremely aggressive. You could have an account that is partly in crypto. You could have an account in individual exchange-traded funds where the risk is quite high, but the returns could be substantial. And of course, that’s something that you have to really weigh with your advisor. What level of risk are you comfortable with? That’s important to dive into. But with most 401ks, they may have an aggressive choice, but even that is probably in a mix of equities. And so I think the important thing is once you have maxed out your 401k, by maxed out, I don’t mean putting in the maximum amount you’re allowed. I mean maxed out to the level where your employer is matching. So let me rephrase that and call that the matching amount. Once you have done that, if you have additional dollars to invest, i think at that time it’s a good time to meet with someone like myself we can sit down and where is the best place for additional money i have to invest beyond the level that my employer matches for my 401k are there additional tax advantages to a taxable account are there advantages to having perhaps a Roth IRA in addition to what my employer is providing. So there’s a lot of things to take into consideration if you have additional resources to invest beyond what your employer is doing with respect to matching in your 401k. And some people invest in real estate, and I don’t have… real estate license, so I don’t have any dog in that fight, so to speak. And some of my clients have been very successful in real estate. And keeping in mind, it’s not liquid. And if you ended up with a rental property, with a not very good tenant, those are some of the risks that you take with real estate, not to mention the lack of liquidity. So having a taxable account can be an attractive alternative to funding your 401k beyond the level that your company is matching. Now, remember what I was talking about at the beginning of the show. I was talking about concerns that people have, concerns about longevity. What if I live into my late 90s like my mother did or something like that? Is my account large enough to continue providing income to that point? What if the market were to have a really ugly turn like it did in 2008? When people have concerns like this, then that usually means it’s time for a call to my office, which is 303-744-1128. I thank you for listening. I hope you found a little bit of this interesting. Those of you who are older will remember the Studebaker. And if you’re younger, Google that. And I got some of my information from Investopedia, which had some pictures of older Studebakers. They were also big truck manufacturers and they made airplane engines during the war. God bless you. Thank you for listening. Hopefully you’ll be here next week and have a great day and a great week. Talk to you next week.
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But are offered and sold through individually licensed and appointed agents.
