Retirement Saving vs. Retirement Planning
Our office recently developed a new client service platform that focuses exclusively on young professionals and those individuals new to the investing process. We call it our Wealthcare360™ - Foundations program. This platform continues to deliver our firm’s wealth care value proposition but specifically focuses on some the important issues facing younger clients: retirement savings and allocation, saving and investing outside of a 401(k), life insurance and estate documents for young parents, 529 college education savings accounts, etc. We are very excited about this program and it’s generated a lot of interest and participation over the past 12 months. The benefit of developing sound financial decision-making at an early age is critical to achieving long-term success.
One of the topics that’s always discussed as a part of our Foundations exercise is retirement. As a young professional myself, I know firsthand that retirement is nowhere near a current concern at this stage of life. In fact, a large percentage of this demographic is still trying to figure out what they are going to do with their professional career, rather than how they are going to end it. Traditional financial planning questions such as when do you want to retire or describe your ideal retirement lifestyle are essentially worthless when talking to someone in their 20s and 30s. There’s too much time and uncertainty ahead for any of this discussion to be meaningful to this demographic. Still the topic of retirement cannot be ignored when speaking with younger clients. After all, a strong savings rate over a long period of time is going to put young professionals in great shape when they start painting their dream retirement scenarios 20 years down the line.
This is why it is important to distinguish between retirement savings vs. retirement planning.
Retirement savings is simply the process of setting aside money knowing that someday you are going to stop working and will need money to support your lifestyle. To start saving, it’s not crucial to know when you are going to retire or how much money you’re going to need. It’s only important to start the process of building up your assets. Later in life, when detailed retirement planning comes into focus, early savers will have benefited tremendously. For young investors, savings rate, time and compounding interest are the most powerful tools in growing their portfolio. For some perspective, a 25-year old looking to retire at age 65 with a $1 million retirement account would need to save $502/month (assuming an annual 6% rate of return). Someone who instead waits until 35 years old to start saving would need to save $995/month to reach that same retirement goal. A 45-year would have to start saving $2,164/month. The power of time and compounding interest is enormous. Productive retirement savers should start saving early and often!!
Retirement planning comes later and involves mapping out a specific retirement strategy. This is when you start identifying retirement age, spending levels and other specific financial goals (vacation home, travel, charitable gifting, estate legacy, etc.). Retirement planning is obviously unique to each individual situation, but this process typically would start 10 to 15 years prior to a planned retirement age. At this point, based on your current balance sheet and retirement goals, advisors can start directing specific ranges and fine-tune savings goals and portfolio recommendations to make retirement dreams a reality. Retirement goals and planning is always a fluid situation, but at this point in life you are at least in range for specific discussions. As mentioned earlier, diligent retirement savers have built a strong foundation for this retirement planning discussion.
The chart at the top of the page is an overgeneralized timeline of a hypothetical retirement scenario. Obviously, there are super savers who aspire to retire at 40 years old and motivated workers who never plan to retire. This chart intends to provide a visual for a typical worker who starts saving for retirement in their mid-20s with the goal of retiring at age 65. As you can see, for at least the first 20 years, the focus is simply setting retirement money aside. Not until age 45 or 50 would any specific retirement planning discussion come into play.
To summarize, developing a sound retirement strategy is a process. Specific planning at a young age is rarely a useful exercise. The process starts with simply saving money, moves towards detailed planning later in life and ultimately culminates with a carefully planned execution towards financial freedom.
Below are some tips to keep in mind for both retirement savers and retirement planners:
- Retirement Saving
- Start early, even if you can only save a little
- If saving into a 401(k) with a company match, save at least the amount that fully utilizes that match
- Implement a strategy to automatically increase your savings rate each year (i.e. increase by one percentage point each year)
- For younger savers in lower tax brackets, consider saving into Roth 401(k) or Roth IRA
- If starting to save later in life, make larger savings percentages a priority
- Retirement Planning
- Be proactive in identifying retirement timeline and income needs (don’t wait until it’s too late!)
- Start by discussing high level goals and values, then develop ranges for specific dollars and deadlines
- Review Social Security statements and educate yourself on other topics such as Medicare and other retirement programs
- Don’t ignore other planning areas (estate planning, tax, insurance needs) when mapping out retirement strategy
- Be confident and understand how to retire on your terms – the peace of mind that accompanies good planning is an unquantifiable value!