A friend of mine, we’ll call him John, recently wanted to know why retirement planning is important.
Perhaps you’ve pondered the same question.
John is well educated and enjoys a successful career. Like many people, John is busy and simply didn’t feel like there were enough hours in the day to tackle one of the most important decisions in his life.
Moreover, even with access to 15 of the best retirement checklists available, he simply didn’t know where to start.
A lack of time and a feeling of being overwhelmed is what made him hesitate about tackling retirement planning in the first place.
As he quickly found out, there are a lot of reasons why retirement planning is important for just about everyone – regardless of education or wealth.
For starters, retirement can last a lot longer than you think. According to Money Guide, a 65-year-old married woman today has a 50% chance of living to age 90!
That means it’s entirely possible your post-career phase lasts 25 years or more. Your life expectancy may be a lot longer than you anticipate.
That’s great news if you’re well prepared. But, if you’re retirement planning is a priority, living longer can be a little terrifying.
The fact is, the average Social Security check in 2020 is only about $1,500, which isn’t nearly enough to maintain pre-retirement standards of living for many individuals. Social security benefits simply don’t provide the income necessary for a comfortable retirement.
Medicare, which is the primary insurer for seniors in retirement, doesn’t cover the healthcare costs many seniors will encounter as they age.
Someone turning 65 this year has a 70% chance of needing long-term nursing care; women, on average, need over three years of supportive care as they approach the end of life. Only 20% of today’s 65-year-olds won’t need long-term supportive care.
It’s more important than ever to have a realistic retirement savings goal and a solid plan for achieving it.
With the help ofafree retirement checklist and a fiduciary financial advisor to help guide your decisions, you stand a much better chance of retiring comfortably—and maximizing your sources of income so you can live the life you want.
Why is retirement planning important? Here are nine powerful reasons.
1. You don’t know what you don’t know
You probably know a lot about many things in life.
But, when it comes to retirement planning, there are literally thousands of factors that can impact your ability to maintain financial security.
Hopefully, you’ll only retire once. But, this also means you lack the experience necessary to identify critical questions and answers that can contribute to a successful retirement.
Retirement planning can help fill in the gaps and answer key questions such as:
- What important tax, savings, and investment information should I plan around?
- What accounts should I consider if I want to save more?
- Am I eligible for social security benefits as a spouse?
- Should I consider doing a Roth conversion?
- What issues should I consider during a recession or market downturn?
- Should i rollover my dormant 401(k)?
- What financial issues should I consider before the end of the year?
- When should I take social security?
- Do I still need life insurance?
- What’s the right mix of mutual funds or investments?
- Should I take my pension as a lump sum?
- How much income can I generate from my portfolio when I retire?
- Which retirement accounts should I draw from first in retirement?
- How can I reduce volatility in my portfolio?
2. Better health due to lower levels of stress
Money problems are a major source of stress. According to the American Psychiatric Association, over 70% of adults worry about money, and that can take a toll on your physical health.
Financial stress is linked to physical conditions such as diabetes, heart disease, migraine headaches, and poor sleep. Not only that, money worries can cause anxiety and depression, robbing you of peace of mind to enjoy your life today.
Taking steps today to get your retirement planning on track is an important step in your overall financial wellness—which can only be good for your physical and emotional health.
3. Send less money to Uncle Sam
No one likes paying more taxes than necessary.
Unfortunately, retirement is a period when taxes can destroy a major part of your income and savings if you aren’t careful. Avoiding those taxes is a major reason why retirement planning is important.
Your tax strategy for retirement should start during your working years. But the tax strategies you use while working will change drastically once you retire. Both are important, but how you approach them is very different.
When you are working, your income is relatively stable and you may not have control over your income sources. As a result, finding deductions and tax credits to reduce your taxable income is paramount.
If you are still building your retirement savings, contributions to your employer’s 401(k) plan can lower your taxable income, saving you money right off the top. If you don’t have an employer plan, you may be able to deduct your qualifying IRA contributions up to the annual limit ($6,000 in 2022, or $7,000 if you’re age 50 or over).
You may also want to consider building a tax-free savings bucket with a Roth IRA, back-door Roth IRA, or even a Mega-Back Door Roth IRA.
Lower earners may even qualify for the Saver’s Credit to further reduce your tax bill. Depending on your adjusted gross income and filing status, you could earn a tax credit of between 10% and 50% of your retirement savings contributions.
You’ll also want to know how to reduce your Virginia income tax or your respective state income tax.
Upon retirement, the more control you have over your income sources, the more likely you will be able to reduce your taxes. If planned appropriately, you’ll want to have three buckets or sources of income in retirement from a tax standpoint:
- Tax Deferred – Includes pension plans, social security, 401 (k)s, and pre-tax IRAs.
- Tax Free – Includes Roth IRAs, Health Savings Accounts (HSAs), and Municipal bonds.
- Tax Managed – Includes standard brokerage accounts with tax-efficient investments like index funds.
Since it’s impossible to predict tax policy in the future, diversifying your income sources in retirement could save you tens of thousands of dollars in taxes upon retirement.
As you can see, reducing taxes is an excellent reason why retirement planning is important.
4. Big-picture context helps you make better career and financial decisions
Life hands you a lot of important questions as you get older. More often than not, the answers aren’t always black and white.
- Should you stay with your company or start your own?
- Does it make sense to pursue a new degree or professional path late in your career?
- Should you pay for your child’s college or fund it another way?
- Can you afford to buy a vacation home at the beach?
These life decisions have a major impact on your finances and can’t—or shouldn’t—be made in a vacuum. Knowing where you are with your retirement plan gives you essential context to make big decisions with confidence.
Making better financial and life decisions is another major reason why retirement planning is important.
5. Enjoy a happier marriage
It’s no surprise that money issues are a leading cause of divorce.
Mismatched financial priorities, high levels of debt, and the inability to work toward a common financial goal all cause marital strife.
When you and your spouse are on the same page with retirement planning, you eliminate some major sources of discord in your marriage.
Take money out of the retirement equation and you can focus your efforts on more exciting decisions—such as where you want to retire.
Hiring a financial advisor who can provide objective, non-emotional counsel may do wonders for your marriage. Maintaining a healthy relationship with your spouse can be a great reason for why retirement planning is important.
6. Forced early retirement won’t be so scary
Retiring at 55 is great when it’s part of your plan; being forced out of your job early isn’t. Unfortunately, nearly half of all current retirees aren’t retired by choice. Most were laid off or forced to leave their jobs, and a smaller number had to leave work prematurely to care for an ill or aging parent or spouse.
If you have to leave work before you’re expected retirement age, you’ll be in a much better position if your retirement plan is already in place.
You might not have your nest egg completely built up, but having money set aside for retirement gives you more options and time to adjust your plans if you need to retire early.
7. You won’t worry about being a burden to your kids
Have you heard of the “sandwich generation?”
That’s the name for the group of people who are simultaneously supporting their children and one or both parents.
About 44% of middle-aged adults with children at home have at least one living parent who could potentially need care; 15% are full-fledged members of the sandwich generation who financially support both parent(s) and children.
A comprehensive retirement plan includes saving for medical costs and potential long-term care costs. When you know your expenses are covered, you won’t have to rely on your family to fill the gap.
8. You can be a really cool grandparent
A good retirement plan not only keeps you from being a burden to your kids, it gives you the resources to be an amazing grandparent.
Wouldn’t it be nice to take the entire brood on an annual trip or host your whole family at your spacious vacation home every year?
Even if your grandparenting goals are a bit more modest, having adequate income means you can visit more often and be present for all their milestones and special events.
It gives you the resources to buy those special birthday gifts or help cover the costs of their college tuition. Money won’t be an obstacle to a close relationship with your grandchildren.
9. Continue your legacy of charitable giving
Most people cut their living expenses in retirement but continue their habits of charitable giving, according to a recent study. We see this a lot with our clients.
If you’ve been a generous giver during your working years, it’s probably important to you to continue supporting your church and favorite charities once you leave your job.
Financial planning for retirement can optimize your charitable giving three ways:
- It helps provide the income you need for charitable giving throughout your life
- It ensures your estate plan aligns with your legacy goals.
- It allows you to reduce your tax burden, if appropriately structured.
While beyond the scope of this article, aqualified charitable distribution strategy can be a powerful strategy to help maximize your charitable donations and reduce taxes!
Bonus: Avoid running out of money in retirement
Few things are more frightening than the thought of outliving your resources. Even a seemingly adequate portfolio can be inadequate for your needs if it’s not managed properly, especially if market conditions change.
Retirement planning is important because it can help you avoid running out of money in retirement.
Your plan can help you calculate the rate of return you need on your investments, how much risk you should take, and how much income you can safely withdraw from your portfolio.
Working with a financial advisor who specializes in retirement income planning means you’ll have the right amount saved when you finally leave work—and that your assets will be managed in a way that protects you against the unexpected so you’re never caught short in a downturn.
That’s the ultimate peace of mind.
As you can see, there are many reasons why retirement planning is important.
Achieving your retirement goals takes a proactive approach. If you start planning for retirement early, the better off your retirement will be in the future. If you are nearing retirement, there literally dozens of strategies available to help you make the most of your next 25 years or more.
At Covenant Wealth Advisors, we believe retirement planning is an essential part of your financial wellness. Working together, we help you clarify your expenses, prioritize your goals, and build a portfolio of assets that sustains a long and fruitful retirement. We are independent, fee-only Certified Financial Planners, which means you get unbiased advice and recommendations that align with your values.
We are independent Certified Financial Planners who operate on a fee-only basis; meaning we never receive commissions for product sales. Additionally, we serve as a fiduciary which means we are required by law to always put your best interests and objectives at the forefront. We can help you find the right retirement strategies to conserve your wealth and the right investments to achieve your goals.
We specialize in helping individuals age 50 plus with retirement income planning and investment strategies.
If you’re not sure where you are when it comes to retirement—or want to refocus your efforts—schedule a free retirement planning consultation today.