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 with a successful career. Unfortunately, he did not have the time to plan out one of the most important chapters of his life; retirement.
He knew there were retirement goals he wanted to accomplish, but he simply didn't know where to start. That's what made him curious about 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 of a powerful retirement checklist and a fiduciary financial advisor to help guide you, 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:
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 2021, 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.