The High Price of Waiting to Plan for Your Financial Future
By Bryan Lee, CFP®, MBA
You may have come across the saying “If you fail to plan, you plan to fail.” This rings especially true in the world of financial planning. Many individuals struggle to get started with organizing their finances, and let’s face it—financial planning isn’t the most exciting topic for most people. We understand.
However, just because it may be tedious doesn’t mean you should avoid it. Delaying the task of planning (just like procrastinating in other areas of life) can result in significant costs, including loss of time, effort, and money. Are you guilty of postponing your financial strategy? If so, it may be time to reconsider. Here are five compelling reasons why you should stop procrastinating and start planning for your financial future today.
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 to support the lifestyle you desire as well as expected and unexpected expenses in the future.
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 ages 55-64 is $120,000, yet the average retirement cost is nearly $46,000 per year! At that rate, a savings of $120,000 will only last 3-4 years if no pension or Social Security income is available. If your annual income is $250,000 or more and you want to maintain that same lifestyle in retirement, then the amount of investments needed to sustain that lifestyle would be north of $5 million depending on if those funds are in Roth or Traditional accounts and other income you might be entitled to receiving.
A sound strategy to avoid running out of money in retirement is to work with a financial professional to articulate what your goals are and determine the extent to which your savings can support them. Contrary to popular belief, you cannot use a multiple of your annual income to accurately determine how much to save. This is why it’s so crucial to plan ahead. The sooner you understand your needs, the more options you will have and the easier your goals will be to accomplish.
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. 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. If there is a long-term care need, nursing home care alone can cost more than $100,000 per year depending on location and the quality of the facility. 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 fewer 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 in the year the contributions are made, and they are instead taxed in the year they are distributed. Assuming your tax bracket is lower in the distribution years, 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.
However, if tax rates increase or if you move to a state with a higher state income tax during retirement, this approach could be less advantageous or even backfire, so careful consideration should be given to how contributions and assets are allocated among your various “tax buckets.” Pre-tax account withdrawals can also potentially increase Medicare premiums since those premiums are based on your Adjusted Gross Income (AGI), so having a thoughtful withdrawal strategy is important, and Roth conversions could be considered to limit Medicare premiums over time.
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). While you pay taxes on the amount converted in the year of the conversion, this allows your money to grow tax-free indefinitely and reduce or eliminate your required minimum distributions (RMDs) in future years as well. With proper tax planning, you can optimize Roth conversions to the top of the 22% or 24% brackets in order to smooth out your taxes throughout retirement.
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, Roth IRAs, HSAs, 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 Growth
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 compounding concept can be applied to your investment account, but be patient -- it’s going to take a bit longer than 30 days, but hopefully you understand the value of compounding and why it’s so important to save and invest today.
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 more conservatively than their risk tolerance dictates when they first come to us, and they miss out on the opportunity for significant growth in even just a slightly more aggressive portfolio.
Even if you think that “markets are high right now,” or that you should wait to invest that cash, keep in mind that the market goes up about 70% of the time for a given year. There will always be times of corrections and recessions, but these work in your favor during your working years since you are able to buy investments that are temporarily “on sale.” It is also important to have a long-term view of 20 years or more for your investments since you will either need it for your retirement and/or you may leave a legacy to your heirs or a charitable cause. During a 20+ year time horizon, the market has always had a positive return, and as a result getting funds invested sooner rather than later, increases the likelihood of reaching your goals. Resist the temptation of trying to time the market and procrastinating your investing.
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? Partnering with a financial professional 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 you are saving enough money. Are those thoughts preventing you from making great memories and living a fulfilling life? For many of our clients, before developing their financial plan, the answer is yes. But it doesn’t have to be that way.
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. Plus a financial professional can take items off your plate so that you can spend time building your business, enjoying activities, and sending time with people that you love.
We Can Help You Get There
Beginning the financial planning process sooner rather than later is crucial, and there are several reasons why. If you have long-term financial aspirations, such as purchasing a home, planning a wedding, or saving for retirement, partnering with a professional can greatly increase your odds of success.
At Strategic Financial Planning, we offer a range of risk-appropriate portfolios to streamline the process of selecting and implementing a personalized investment strategy. With our support, you can trust in your financial future and return to the activities you enjoy. Contact us today by calling (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional.Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.