When Should You Start Retirement Planning?
by Gabriel Lewit
Benjamin Franklin once said, “Never put off until tomorrow what you can do today.” The same is true of retirement planning: start doing it today so you can be comfortable in your golden years.
Retirement planning at any age can benefit from the expertise of a financial advisor.
New college graduates in their twenties rarely think about what their financial needs will be in their seventies. Most of them are enjoying life while they can, keeping 401(k) contributions low and saving for marriage, children, and mortgages. Retirement just isn’t a priority.
Unfortunately, the order of importance is reversed in this line of reasoning. Lifetime companionship and homeownership should be addressed, but 401(k) or pension contributions need to come first. We explain the reasoning behind that in this post.
Understanding Tax Deferment and Compound Earnings
One of the most compelling reasons to start planning for retirement at a young age is the magic of compound interest.
Contributions of just $100 per month to a retirement account with an average return of 8% and a $1,500 principal could net you over $165,000 on a thirty-year plan. It’s not much to put aside, even in your twenties. Cut five years off that and the number sinks to $106,000. That’s the price of waiting until tomorrow.
Use this compound interest calculator to discover how the age at which you start planning for retirement can affect your retirement plan.
Every dollar you contribute to a retirement fund can be tax-deferred. That means that you don’t have to pay taxes on it today. It also means that the amount you do pay taxes on will be significantly lower, as will your overall tax bill. That money adds up.
Once your contribution is made, the funds inside your retirement plan will grow tax-free until you withdraw them. Better yet, any gains, dividends, or interest you earn from the holdings in your retirement plan will compound and increase the principal for your retirement.
Just as your nest egg grows with each year of tax-deferred contributions, your losses compound when you wait to start your retirement planning. Thinking you can put it off and somehow “catch up” later doesn’t usually work. Life presents too many obstacles for that to happen.
Why You Should Start Making Maximum Retirement Contributions ASAP
Since 401(k) and pension contributions are tax-deferred, the IRS places a limit on the amount you can contribute per year. For an employer-sponsored 401(k) plan, that limit is $19,500 per year in 2020. For an IRA or Roth, it’s just $6,000 per year. The limits go up after age fifty.
The example we used above was for a yearly contribution of $1200. If you change that number to the maximum contribution allowed and do it by age thirty, you could retire at sixty with $2.15 million in the bank. That’s provided the annual ROI remains at 8%.
Open up a Roth IRA if you have more to contribute than the 401(k) max. Assuming the same rate of return, that will add another $708,807 to your retirement savings. Sure, you’ll have to sacrifice some things while working, but you’re looking at a $3 million payout when done.
Maximum contributions are difficult to make when you first break into the workforce. Build towards that level and try to attain it by the age of thirty. Get there and you’ll be in a position to meet your savings goal and retire early. The thought of that should make receiving less money now more palatable.
Savings Accounts, Investment Portfolios, and Your Retirement Planning Journey
Savings accounts seem like a safe place to park your money. However, most accounts do not offer enough interest to keep up with the rate of inflation, which means your money will decrease in value over the years.
To avoid such a loss, it can be wise to turn to investments. This is an area where you can heavily benefit from professional advice. There are some savings options, such as money market accounts, that offer better rates. Stocks are a gamble, but the market has consistently averaged a return of 11% or higher for investment professionals.
A sound investment strategy will take into account where you are in your retirement planning journey. Investors who are far from their target retirement age and who have started planning early can find greater reward in higher-risk investments. Investors who are closer to their retirement age are typically better off with conservative investments as they lack the luxury of time, which can be necessary for market rebounds.
The stock market is affected by a wide range of economic factors. Professional traders review graphs and charts to predict uptrends and downtrends. The best financial advisors spend hours analyzing balance sheets and financial reports, applying years of formal education to identify the best choices given an individual’s financial landscape.
Unless you went to school for finance and accounting, you are taking a huge risk by managing your own stock portfolio. Increasing your annual contributions to a retirement fund is one thing. You can do that yourself. For other investing, seek professional help.
It’s Never Too Late to Start Retirement Planning
Although there are distinct advantages to making a plan earlier in life, it’s never too late to start planning for retirement. Every step you take at every stage of your life counts.
Moreover, retirement planning is an ongoing process. No matter how old you are when you form your initial plan, you need to revisit that plan regularly. Life events like marriage, having a child, and changing jobs can affect your budget, not to mention your goals and priorities. Plus, you’ll need to start considering other factors as you age, such as purchasing life insurance in your 40s or 50s and more robust estate planning in your 60s.
Additionally, your retirement strategy should evolve as you near your target retirement age. For example, a higher risk, higher return retirement investment might make sense when you’re 30 but is less likely to be appropriate when you are 65. Similarly, the percentage of income you invest in your retirement accounts may need to be smaller when you’re younger and saving for a house. However, as you become more established in your career, finances, and assets, you may discover that you have more discretionary income to allocate to your retirement funds.
Working with a comprehensive financial advisor can help you clarify your goals, plan, strategize, and tweak your plan to match the twists and turns of your life.
Seeking Professional Retirement Planning Advice from a Financial Advisor
All financial advisors are not created equal. When seeking professional assistance in planning for retirement, you’ll want to find someone who specializes in that area. There are also fees to consider. Don’t just price shop – look for transparency.
The word “fiduciary” describes an advisor who is legally required to act in good faith when it comes to their clients’ best interests. These advisors are obligated to disclose any conflicts and provide thorough and quality advice.
Another term to look for is “holistic.” When helping you plan for retirement, a holistic financial advisor will take into account the broader contours of your financial landscape, such as cash flow, asset protection, and tax strategy.
A holistic, fee-transparent fiduciary who specializes in financial planning, like Buffalo Grove’s SGL Financial, is your best choice when it comes to retirement planning. Don’t make the mistake of thinking you can’t afford to pay a financial planner. If you want to retire comfortably, you can’t afford not to. Those extra dollars you spend planning your retirement with a financial advisor will be more than made up for in your retirement distributions later in life.