The Cost of Putting Off Financial Planning
Most people can easily feel overwhelmed when it comes to the topic of organizing their finances. Some find the topic of financial planning just plain boring. We get it. Whether you find it overwhelming or boring, financial planning should not be avoided. Think about all the time you spend worrying about finances and whether you are saving enough money. 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. Let’s take a look at five ways that not having a plan could be costing you.
1. You’re Probably Not Saving As Much As You Should
The first reason you shouldn’t put off financial planning is that you’re probably not saving as much as you should. That’s not to say that the savings you do have shouldn’t be celebrated. 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-plus years. Not to mention rising inflation that will decrease the value of your savings over time and the additional expenses you will likely encounter along the way. 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, a savings of $120,000 will only last 3-4 years.
A sound strategy to avoid running out of money in retirement is to work with a financial professional to understand what your savings can handle. Contrary to popular belief, you cannot use a multiple of your annual income to determine how much to save. 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 manage.
2. Healthcare Costs Are on the Rise
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.
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 professional can help you evaluate your options and build a long-term plan for healthcare.
3. Tax Strategies Take Multiple Years to Implement
Another reason not to put off financial 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 and ultimately reduce the amount of taxes you owe. This strategy could save you thousands of dollars in taxes each year. The earlier you start, the more you’ll save over the course of your career.
Roth Conversions
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.
Withdrawal Strategies
When it comes to withdrawing from your retirement accounts, how you take your distributions can make all the difference. Each retirement asset (employer-sponsored accounts, Social Security, traditional IRAs, etc.) has different tax characteristics. Creating a withdrawal 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 financial planning can leave you stuck with a huge tax bill that could have been avoided.
4. Take Advantage 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 the money that is invested as well. The money contributed to your retirement account each year can 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.
If you wait to invest, you may be missing out on growth year after year, and the resulting loss of earnings can be substantial. Not to mention the potential for loss when you try to invest yourself without the proper advice and guidance of a professional. 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. Financial Planning Can Alleviate 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? Financial 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
Partnering with a financial professional can help alleviate the stress and anxiety that comes from trying to figure out your finances. If you have long-term financial goals (like buying a house, planning a wedding, or saving for retirement), working with a professional can be one of the best things you can do to set yourself up for success. To learn more about WealthBuilders and how we can help you, please call 715-386-3735 or email info@wealthbuilders.financial.
About Dan
Dan Olsen is the president, founder, and wealth advisor at WealthBuilders, an independent financial services firm based in Hudson, WI. Before becoming a financial advisor, Dan had a nearly 25-year career as an on-air radio personality and spent several years in corporate America.
Dan helps clients build and manage their wealth to create a specific plan for retirement and loves teaching them that being wealthy is about more than just money. Through his distinct collaborative approach, he provides the financial guidance and resources necessary to help clients move forward in life and put their values into action. He loves knowing he has a purpose and that his work and effect on people and their lives matters. Through his education and 20-plus years of experience in the financial world, he has gained extensive knowledge and expertise in the financial industry, including obtaining the Series 7, Series 66 held with LPL Financial, and Life/Health & Accident insurance licenses.
Outside the office, Dan enjoys visiting the Great Lakes with his wife, spending time with his grandchildren, fishing (and ice fishing), listening to ’70s and ’80s music, and supporting charities that address food insecurity, especially with children. To learn more about Dan, connect with him on LinkedIn.
WealthBuilders Inc. and LPL Financial do not offer specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
All investing involves risk, including the possible loss of principal. No strategy assures success or protects against loss.
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(1) https://smartasset.com/retirement/average-retirement-savings-are-you-normal
(2) https://www.financialsamurai.com/the-average-spending-amount-in-retirement-is-surprisingly-high/
(4) https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs