How sound is your financial ship?
According to a 2017 survey from the American Institute of CPAs, 49 percent of non-retired Americans are not confident that they'll be able to reach their retirement goals. Their lack of confidence was driven largely by worries over rising healthcare costs, taxes, and the future of Social Security. If you're experiencing similar concerns, fine tuning your financial strategy may be the solution.
"Everybody needs to have a plan," says Brian S. Kuefler, Vice President, Senior Financial Planner at First Horizon Bank.
A sound financial plan is essential to your economic well-being. Retirement is a big part of the picture, but your plan should also cover things like day-to-day spending and anticipating life's curveballs.
Part of shaping your financial plan means knowing what mistakes to avoid.
Mistake #1: Waiting to Start Planning
Procrastination can be enemy number one to your financial planning success.
Timothy Wiedman, a retired former associate professor of management and human resources at Doane University in Crete, Nebraska, waited until his 30s to begin saving for retirement. When he finally opened an individual retirement account, he didn't maximize his annual contributions right away.
"I justified my poor money management by telling myself that I could catch up on retirement after my career had blossomed and I was making a better salary," Wiedman says. In the meantime, he missed out on years of compounding interest potential.
Ideally, planning should begin in your 20s, but it's not too late to rescue your retirement if you're starting in your 30s, 40s, or beyond.
Getting a grip on spending is an important part of your strategy.
"Developing a budget and tracking it over time is step one in getting into a longer range plan," Kuefler says. Regardless of where you are in terms of your age, "you need to know what's going in and out" to understand how much you can afford to save.
Mistake #2: Not Setting Realistic Expectations
How much money do you think you'll need to retire?
The Employee Benefit Research Institute's 2017 Retirement Confidence Survey found that 63 percent of workers expect to need less than $1 million for retirement. Twenty-two percent believe they'll need $1.5 million or more. Understanding where you fall on this spectrum can help you shape your retirement outlook.
Wiedman always assumed he'd retire with $1 million saved in his 403(b) and individual retirement accounts. He also planned to work until age 70 to maximize his Social Security benefits. Health issues, however, forced him to retire a few months shy of his 63rd birthday.
"If I'd been able to carry out my plan and continued to max out my retirement contributions, I'd have gotten close to my million-dollar goal," he says.
As it was, he retired with approximately $650,000 in savings. He downsized to a smaller home and now lives comfortably on a combination of retirement savings, a small state pension, and Social Security. But, his retirement planning didn't account for the possibility of a health issue's shrinking his future income.
Being downsized into early retirement or living longer than expected are two other possibilities that your plan needs to account for. Both scenarios can impact how much money you'll need to fund your lifestyle in your later years.
Mistake #3: Failing to Create Additional Safety Nets
Saving for retirement may be a priority, but it's not the only thing you need to plan for.
Lack of an emergency fund led Wiedman, when he was in his mid 30s, to withdraw $3,300 from his IRA to buy a used car after the one he'd been driving broke down and was deemed too expensive to fix. He had to pay income tax on the withdrawal, along with a 10 percent early withdrawal penalty. Yet the bigger loss was to his future account balance: Wiedman calculated — based on his age at the time, his planned retirement age, and the average annual return (since inception) of the fund in which the money was invested — that, over the 30+ years that the investment's return could have compounded, the $3,300 withdrawal cost him at least $60,000 in retirement savings growth.
According to a 2017 Bankrate survey, only 39 percent of Americans would be able to pay for a $1,000 emergency out of savings. Having six to 12 months' worth of expenses saved in a liquid account can keep you from having to tap your retirement savings prematurely.
Kuefler says annuities, long-term care insurance, and life insurance can also be helpful additions to your financial plan. Life insurance provides a death benefit to your loved ones, and cash value policies can be a tax-free source of cash loans or withdrawals during your lifetime. Annuities can provide you with an income stream in retirement which is guaranteed by the insurance company. Long-term care insurance can help pay for nursing care so you don't have to spend down your retirement assets.
"Long-term care, out-of-pocket healthcare expenses that Medicare doesn't pay, inflation, and taxes are the biggest things that take retirees by surprise," Kuefler says.
Expanding your financial plan to include an annuity, long-term care insurance, or life insurance can help mitigate potentially negative impacts on your retirement security.
Mistake #4: Thinking You Can Go It Alone
Working with a financial advisor can yield numerous benefits, starting with helping you curb emotional decision-making tendencies. Kuefler says, in a down market, an advisor can keep you from panicking and making moves in your portfolio that could cost you long-term growth.
"You have to be right twice — you have to know when to get out of the market and when to get back in," Kuefler says, and that's difficult for the average investor to do successfully.
An advisor can help you ride out the ups and downs of the market over time.
They can also help with making adjustments based on how your values, goals, and life stages change.
Kuefler says, when you're looking for an advisor, to consider their investing philosophy, fee structure, and what their typical client looks like. This can give you an idea of how well suited they are to providing advice specific to your situation, and the degree of attention they'll be able to provide.
Mistake #5: Not Reviewing Your Plan Regularly
Financial planning isn't a set it and forget it proposition. Periodic reviews are necessary to help ensure that you're staying on track. Some of the things you should be reviewing regularly include your savings rate compared to your overall goals, the asset allocation in your investment portfolio, the tax implications of your decisions, and the adequacy of your insurance coverage.
But how often should you be checking in?
"I generally recommend reviewing things once a year if there are no major changes," Kuefler says.
On the other hand, if you experience a job loss, get married or divorced, are planning to send a child off to college, or receive an inheritance, you'll want to revisit your plan immediately to gauge the impact of those events. The more hands-on you are in your approach to your financial planning, the better your chances of avoiding any major missteps.
The need for financial education is clear. While each of these mistakes can do harm to your savings and future goals, it's the waiting to get going that can do tremendous damage. Generally speaking, the people who step into retirement financially prepared have established good habits over a long period of time.
To be more specific, "If more young folks received better financial educations during high school or college, maybe their spending priorities would change," says Wiedman. "I certainly believe that having the information provided above might have convinced me to get an earlier start on my own retirement plans."