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CNN Live Saturday

Interview with Steve Kaye

Aired April 06, 2002 - 22:47   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CATHERINE CALLAWAY, CNN ANCHOR: In the May issue of sister publication, "Mutual Funds" magazine, the editors ask, how can you repair your retirement account? In a moment, we're going to speak with the executive editor, Steve Kaye, about his magazine's formula for retirement planning, which suggests that you follow a three prong approach: make it, make it being money that is; work it; and spend it.

Welcome Steve Kaye. We thank you for being with us tonight.

STEVE KAYE, MUTUAL FUNDS MAGAZINE: Thank you. Good to be here.

CALLAWAY: You know, I know everyone should look back, see where they are. It's so depressing as of late to see where we are on our retirement accounts. So let's start it with make it. Most of us feel they don't make enough.

KAYE: A lot has changed over the last couple of years. And we really suggest that people think of their retirement planning in those three stages. We put in the magazine, we put make it, work it, spend it, but the way I remember it is earn it, churn it, and burn it. Those are the three things you have to do.

And you really got to think of each one separately, focus on each one, and you'll do better if you do it that way, rather than think of some big mushy 30-year plan. It's kind of scary that way.

CALLAWAY: It is scary, no matter how you look at it, as far as I'm concerned. You're seeing you need to just push those retirement plans to the absolute limit, no matter what?

KAYE: The retirement plans that are tax-deferred, the 401Ks, the IRAs, things like that, the government is giving you a big break. You should use those to the absolute max. But there are ways to use them that are smarter and ways that are not so smart. And that has to do with what kind of order you use them in.

For instance, if you get a company match at your company in your 401K, absolutely, that's the first thing you should do. That's free money. If you don't use it, it's like turning down a raise.

CALLAWAY: What about catching up? You know, if you're say almost 50, and you realize you're not where you should be, what exactly do you mean by catching up? And how does one go about doing that?

KAYE: You know, these retirement accounts are finally catching up themselves with the times. You used to be able to put only $2,000 a year into an IRA. Now $2,000 is a nice chunk of change. Don't get me wrong, but that hasn't changed in decades.

Now finally, we are able to put more in. $3,000 this year into an IRA. And if you're 50 or over, you can put an extra $1,000 every year. In your 401K at work, you can put an extra $1,000 in if you're 50 or over. And that's going up every year, up to $15,000.

CALLAWAY: Wow.

KAYE: So you've got to take advantage of that. You have to.

CALLAWAY: Yes, that's a big advantage, isn't it?

KAYE: Yes, the...

CALLAWAY: All right, let's move on. I'm sorry I'm going through this so quickly, but I want to make sure we get through all three steps. Let's move onto the second one, which would be work it. What exactly does that mean?

KAYE: Well, a lot has changed here, too. Most people's accounts, as you said, right at the top are below where they used to be. And it's discouraging. What we find is a lot of people are sort of going too far towards safety now. You've got to stay in the game. It doesn't mean you want to go crazy, but whereas most people have too many assets in stocks before, we see people moving toward cash and bonds right now.

CALLAWAY: Right.

KAYE: And that's not good. You're not going to know the day before the market's going to start going up again.

CALLAWAY: Yes, but it is so scary. And it hard to know whether you should be conservative or aggressive. You say be aggressive.

KAYE: We say be both. We say have a nice, aggressive component, so that you know you're participating in the market, but also, have some in bonds and some in cash...

CALLAWAY: But not all.

KAYE: That's right, so that there's some smoothness there.

CALLAWAY: I like this one. Spend it, the third step.

KAYE: That's fun. That's the fun part. Here's the big problem that a lot of people have. They assume that if they can make, seven or eight percent a year on their accounts, that they can spend seven or eight percent a year of their accounts.

CALLAWAY: Right. KAYE: The math doesn't work, because when the market drops, if it drops early in your retirement, you may not be able to recover. So a more conservative rate is needed. And what we say is you reverse engineer your spending. That is, figure out how much you need every year. Figure out what percentage that is of how much you have, and then if it's five percent or above, you got to scale it down, because you could retired for what, 15, 20, 30 years.

CALLAWAY: You know, I don't care how you look at it though. No one is ever where they think they are until -- you know, they think they're a certain place in their retirement -- building their retirement accounts, but do you find that most people are astounded when they realize where they really are?

KAYE: Yes, they're astounded. And generally, they're not happy about it. But you know, retirement is largely or preparing for retirement, it's a mind game. You have to get yourself into the right mind set. And we find when people look at the numbers and they see, oh, my gosh, I need half a million or a million dollars to retire for 20 or 30 years...

CALLAWAY: Right.

KAYE: It sounds like so much. Don't forget though, if you've got 20 years into a retirement, prices are probably going to double between now and then.

CALLAWAY: Right.

KAYE: So whatever you think you need, it's really only about half as much in today's money. So what we say is do prepare. Save as much as you can. Invest aggressively with some conservative around the edges. Stay in it. And keep after it.

Look, if you don't, you're not going to be successful. And if you do, you might be.

CALLAWAY: T.K., great advice. Thanks for staying up with us on this Saturday night.

KAYE: Thank you.

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