By Adam K. Wright, CFA®, CFP®
Planning for retirement takes a long runway. Waiting for conditions to improve or until you make a little more can cost more than you think, thanks to the effects of compounding. Where most people get stuck is thinking that they don’t make enough or have enough to hire a fiduciary financial adviser. However, hiring a fiduciary financial adviser to create a workable retirement plan for your situation is what financial planning is all about. Not having a retirement plan, even for those starting their careers, could be costing you—in more ways than one. In fact, not hiring the right fiduciary financial adviser and not creating a retirement plan could cause you to have to work longer, invest more aggressively than you want, or live on less when the big day comes.
If you have been putting off your retirement plan, consider these 5 reasons why you should stop procrastinating and start retirement planning today. As we like to say, “The best time to create a financial plan was when you got your first job, the second-best time is today!”
1. Saving Enough?
The first reason you shouldn’t put off retirement planning is that saving early, even the smallest amounts, can pay off huge in the end. That’s not to say that the savings you do have shouldn’t be celebrated. They absolutely should. Every dollar counts! But no matter the amount you have, you need to be sure it will be enough.
If you plan to retire in your mid-60s, your retirement savings may need to carry you through 30 years or more of retirement. A study by the Center for Retirement Research estimated that the median retirement savings of Americans age 55-64 is $120,000, (1) yet the average retirement cost is nearly $46,000 per year! (2) At that rate, retirement savings of $120,000 will only last 3-4 years.
Retirement Income Strategy
A retirement income strategy lays out a framework for spending your assets during retirement with the primary goal of not outliving them. One of the best ways to avoid running out of money in retirement is to work with a fiduciary financial adviser to understand what your savings can handle. General rules of thumb can be useful guideposts, such as targeting a multiple of your annual income. Yet retirement plans are customized to you. No one is actually average, and everyone has different income sources, sometimes resulting in wildly different retirement income plans even though nest eggs may be very similar! This is why it’s so crucial to plan ahead. The sooner you understand your need, the more options you will have and the easier your goals will be to accomplish.
2. The Impact of Healthcare Costs
If you’ve ever held a hefty medical bill in your hand, you aren’t alone. Healthcare costs in America are among the highest in the world. (3) And as you age, you will likely require more healthcare services. According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will need about $300,000 saved to cover healthcare costs in retirement. (4) Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Fortunately, the majority of those healthcare costs come at the end of retirement, so there is time to prepare as part of your retirement plan.
Given the events of the past two years and continuing inflation, it’s more important than ever to start preparing for the ever-increasing cost of care. The longer you wait, the less options you’ll have. Working with an experienced fiduciary financial adviser can help you evaluate your options and build a long-term plan for healthcare costs in retirement.
3. Retirement Tax Strategies Can Take Years to Implement
Another reason not to put off retirement planning is that if you don’t start early, you’ll miss out on several tax strategies that take years to implement, including:
Tax-Advantaged Retirement Savings
If you’re in a high tax bracket, being able to save for retirement with pre-tax dollars is a great advantage because pre-tax contributions reduce your taxable income today, and, ultimately, reduce the amount of taxes you owe. This strategy could save you thousands of dollars in taxes each year, leaving more money in the market to grow for your benefit. The earlier you start, the more you’ll save over the course of your career.
Roth conversions help to increase your retirement savings and decrease your long-term tax liability by transferring funds from a pre-tax retirement vehicle (traditional IRA) to an after-tax account (Roth IRA). This allows your money to grow tax-free for as long as you’d like, and required minimum distributions (RMDs) are avoided as well. It can take years to successfully manage taxes while converting to a Roth IRA. Having a plan now may help you enjoy lower taxes during retirement.
When it comes to spending from your retirement accounts, how you take your distributions can make a big difference. Each retirement asset (e.g., employer-sponsored accounts, Social Security, IRAs) has different tax characteristics. Creating a retirement income strategy can help lower your tax burden by structuring withdrawals from each income source in a tax-efficient way.
To properly implement these strategies and more, a long-term understanding of your full financial picture is required. Putting off retirement planning can mean getting killed in taxes during retirement. Remember, Uncle Sam is not so patiently waiting for its claim on your retirement accounts!
4. The Benefits of Compound Interest
Just as saving early allows you to take advantage of massive tax savings over time, there is a compound effect that occurs with invested money. Compounded interest, or interest on interest, helps your retirement accounts grow exponentially over time, but the key part of that equation is time.
A single penny that doubles every day for a month may not seem like much on the surface, especially when compared to $1 million up front. But by the time the 30th day rolls around, you will have over $5 million in pennies. This same concept can be applied to your retirement account, but because retirement investments are at the mercy of the highs and lows of the stock market, it will take more than 30 days to see that kind of growth. So, think in terms of decades, not minutes or even years.
If you wait to invest, you are missing out on growth year after year, and the resulting loss of earnings can be substantial. Not to mention the added power of investing better, to make sure investment costs are low, portfolios are diversified, and market risk is kept in check, when working with a fiduciary financial adviser. We’ve found that many clients are often invested too conservatively and miss out on the opportunity for significant growth in even just a slightly riskier portfolio.
5. Having a Retirement Plan Can Reduce Stress
Do you feel 100% confident about the myriad of financial choices you make day in and day out? Have you encountered more complexity as your assets have grown? Partnering with a fiduciary financial adviser can help alleviate the stress and anxiety that comes from trying to figure out your finances.
Think about all the time you spend worrying over finances and whether or not you’ll have enough for retirement. Are those thoughts preventing you from making great memories and actually living your life? For many of our clients, the answer is yes. But it doesn’t have to be that way.
Retirement planning can help alleviate the stress that comes from not knowing where you stand or how to achieve your goals. It can provide clarity by defining a path from point A to point B and allowing you to get the most out of your life along the way.
Get Started Today
If you have long-term financial goals (like buying a house, planning a wedding, or saving for retirement), working with a fiduciary financial adviser is one of the best things you can do to set yourself up for success. Don’t leave your retirement goals to chance. Hope is a risky financial strategy!
Adam Wright is a CERTIFIED FINANCIAL PLANNER™ at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.
Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.