A financially successful life doesn’t just happen. It requires planning and discipline. Those with a solid retirement foundation tend to start saving early. Compounding – the exponential growth of savings over time – is the most powerful weapon we have for financial success. While the power of compounding is important throughout our lives, each of the phases of retirement planning calls for different priorities and tactics.
Understanding where you and your family are in your financial journeys and your unique time horizons are important for you to reach your goals. What you should be doing when you are in your 20s and 30s is often much different than what you should be doing at age 52, 62, or 82. At Magellan Financial, we break down the financial life into four phases, each of which is important for setting us up for success in retirement:
Early Accumulation Phase
For most people, this phase begins when we exit school and enter the workforce. The key financial considerations during the early accumulation phase are your earnings, the development of a savings plan, and determining what type of debt to take on now that may benefit you in the future. Ignoring one of these keys during the early accumulation phase often requires you to course-correct in later phases.
Planning: Planning at this stage is about protecting your future and that of your family. On the investment side, it’s about saving as much as possible so compounding can work for you over the long-term. Per this simple chart from businessinsider.com, starting to save and invest for retirement at age 25 can result in almost twice the retirement savings compared to starting at age 35.
Source: businessinsider.com
Term life insurance is a great tool to protect your family in case the unexpected happens. Also, consider educating yourself about personal finance to help keep your plan on track and to make necessary adjustments. For example, by subscribing to Magellan’s blog recipients list (subscription box located in the sidebar, at right on desktop devices), you can receive 2-3 insightful blogs each month that recap the market and address other common financial concerns.
Earnings: The goal is to earn enough to comfortably cover living expenses with enough money available for savings. If you leave school with a highly marketable skill that pays you well, this is an easy hurdle to reach. For the rest of us, an honest assessment on what you could do to earn more can be very beneficial. For some it may be putting in the work and time to move higher in your current workplace. For others, investing in yourself may be a necessity to improve your career trajectory. It could also be as simple as picking up a side hustle.
Save: Life gets more expensive as it progresses. In our post-college years, things can be simple – live with a roommate or two in a cost-effective apartment. Later, we get married, maybe have children, and take on more expensive habits. Are you managing this lifestyle creep and actually saving? When you get a raise or promotion it is OK to spend more on yourself, but it is also necessary to add to total yearly savings. Your goal should be to save 10%+ of your income.
Debt: Taking on debt in a thoughtful way can be prudent. Be it paying for education or your first home, proper use of student loans and/or mortgage debt can pay long-term dividends. But taking on unproductive debt can limit your ability to save and invest for your future. Consider the pros and cons of each debt option. For example, if financing a master’s degree with loans, what additional revenues might it produce? Talk to your employer (or find another) and convince them of the benefits of contributing toward it, lowering your own debt burden.
Growth and Planning Phase
At a certain point we have established ourselves in a career with a clear path for what’s to come. These are the key savings years for most people. They also tend to be the most costly as this is when many of us are raising families while paying for homes, cars, college, and other expenses. That’s why effective planning can help keep you on the right path – or allow you to make changes to meet your retirement goals.
Planning: Ideally, you want to start retirement planning in your late-40s or early-50s. People often have enough money saved that they would benefit from talking to a financial advisor to see how they are doing and to hear more refined investment recommendations. This is also the time to reevaluate your insurance needs (including life insurance, disability insurance, and long-term care insurance) as well as forecasting future medical expenses.
Make Necessary Adjustments: What if you haven’t done much saving yet? Don’t worry, you’re not alone. According to the AARP, nearly half of Americans age 55 or older have nothing saved for retirement. While you may have missed out on some of the biggest benefits of compounding, there’s no better time than the present to start really saving for retirement. But you will need to turbocharge your planning. Set up a budget and automatic savings into retirement accounts. Save as aggressively as possible, including taking advantage of higher contribution limits available to those 50+. Try to find a side hustle and consider working beyond age 65 either full-time or part-time.
Investment Management – Growth: Are your investments correctly allocated for long-term growth? Your savings rate remains important, but after about a decade of ongoing contributions, the greatest driver of outcome isn’t spending behavior and contributions, but rather your portfolio’s growth. Being too conservative or overly aggressive with your 401k and other investment accounts can be costly. This is why speaking with an advisor can make so much sense for those in this phase of their retirement planning.
Debt: As in the early accumulation phase, proper use of debt can pay long-term dividends. This may involve stepping up to a better house or considering an investment property. You want to limit consumer debts to ensure you can maximize the savings and investment opportunities available to you. For many, paying down debts during this phase can also make sense.
Preparation Phase
The final 5 years prior to expected retirement are important. Ideally you enter the preparation phase with enough accumulated assets and plans in place that allow you to stop working if life necessitates it. This is a point when you want to be prepared for the unexpected such as health issues, family care needs, or employment loss. Many solid plans have been compromised by not considering potential adverse events.
Planning: Along with making sure you have the necessary accumulation of assets, now is the time to start thinking about what a post-work lifestyle looks like. Do you want to travel the world? Hang out with the grandkids? Have a second home in a warmer climate or at the beach? Think about where you want to live – not just upon retirement but over the course of your retirement years.
Speak with an Advisor: As important as what retirement will look like, you also want to start talking with your financial advisor to determine your retirement income preferences. The number one question you need to answer is: Do you desire to take a more safety-first approach or are you willing to be more dependent on market forces and have the possibility for greater income and a larger estate? You also need to consider how and when to take social security benefits. Our free Guide to Social Security & Medicare Benefits can help you weigh your options.
Investment Management: Once you have determined the timing, the method, and how much income you prefer to receive in the final Distribution & Preservation Phase, your investment portfolio can be designed to meet your unique needs. In many cases, your investment portfolio will transform during this time period to look much different than it did in the Growth and Planning Phase.
Debt: Ideally, once you enter the preparation phase, you should be either winding down your debt payments or debt-free. This is usually the phase when you should be looking to finish paying monthly mortgages and any lingering educational loans. By limiting your payments to fund previous purchases you can free up cash flow for more savings in the final years before entering the distribution and preservation phase.
Distribution & Preservation Phase
This phase is when you have entered retirement and no longer have the income to which you’ve grown accustomed. Portfolio balances are no longer growing at the same rate and major missteps can be amplified by the fact that you can often no longer simply earn more money to make up the difference. That’s why a careful distribution plan along with a plan to preserve your hard-earned assets is critical.
Distribution: How and where you receive distributions is a very individual decision. Some prefer to have a safety-first approach with as much income as possible coming from steady, sometimes guaranteed, sources (social security, pension, annuities), while others are comfortable with being more dependent on market forces and the possibility of greater assets passed along to heirs. How your distribution plan is designed can stretch your savings by years. By initiating an Intelligent Withdrawal Plan you can make your money work harder for you, stretching out savings and preserving capital for your later years or legacy plan.
Investment Management: The goal is no longer growth but slow growth, preservation of capital and income distribution. The goal is to have an income stream you cannot outlive. Cash flow management, as well as contingency plans for unexpected healthcare expenses, are an important component. Many of our conversations in this phase focus on health insurance, disability insurance, and long-term care insurance options.
Legacy Planning: Many clients are interested in passing their legacy to the next generation, be it their children and grandchildren, or their favorite charity. That doesn’t just mean passing along assets after your death. You want to have an estate plan in place, but don’t discount the joy of giving while you can see the joy of your recipients! This could mean gifts to children or saving for grandchildren’s college in a 529 College Savings Plan. Charitable Remainder Trusts and Charitable Gift Annuities allow you to give money to your favorite charity.
What To Do Next
Regardless of where you stand in the 4 Phases of Retirement Planning, it’s clear that planning is essential. A professional wealth advisor can help you understand your various options and make sense of what path makes the most sense for you. Remember that where you and your family are on your personal financial journeys and what your personal time horizons look like are important factors to reach your goals.
For More Information About Retirement Planning, Contact Our Team Of Financial Advisors Today!
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