Start 2015 Planning for the Future
Written by Martin X. Shields
For all of our clients we act as their Personal CFO providing guidance on a wide range of financial planning matter they may face in their life. Although the areas we counsel our clients in can vary widely depending upon their circumstance, the most common need is retirement planning. Many times these discussions occur when a client is still working and they need to implement the correct plan in order to be well positioned when they retire.
As we are beginning a new year, we thought it would be beneficial to highlight a few basic tenets of successful retirement planning.
· It’s not what you make it’s what you save – This is probably one of the most important points to remember in order to retire successfully. A good rule of thumb is to save 10-15% of your compensation annually but increasing that number can be beneficial. We have never found a case where someone has saved too much for retirement.
· Save early and often – The earlier you can start saving for retirement, through the power of compounding, you will be in a much better position to retire compared to the alternative of saving more later in your career.
· Don’t be afraid to take on risk – Recent data shows that millennials are less inclined than other generational groups to take on risk with their investments. The problem with this approach is that under most conditions being overly conservative will not provide enough growth in a portfolio to properly prepare for retirement. Working with a professional investment advisor will prepare you to understand the important relationship between risk and return and to minimize your fear of volatility.
· Tax deferred beats taxable – Whenever possible, it is best to save into a tax deferred account such as a Roth IRA and 401(k) or a Traditional IRA or 401(k). The preferential tax treatment received by these accounts can play a big role in retirement success.
· Emergency reserve fund provides a foundation – Having an emergency reserve fund may not seem like an important requirement for retirement planning but without an emergency reserve fund many individuals are inclined to tap their retirement accounts for emergency cash needs. In these circumstance they are paying penalties and ordinary incomes tax on the distributions from tax deferred accounts.
· Pay down debt – For most individuals and couples it is best to have all major debt paid down when retiring. It can be difficult to fund a retirement with a large mortgage or boat loan that needs to be paid in retirement.
· Determine how to manage the equation – A big part of the retirement equation is determining how much you will need to spend in retirement and where income will come from to fund your goals. There are many ways to make the equation work but you first need to start understanding the components of your equation.