Retirement can be quite challenging and overwhelming for people who are used to working day in and day out. Retirees are used to once receiving a fortnightly paycheck to keep them afloat and meet their daily expenses. But retirement comes with a loss of a steady paycheck and the prospect of having to modify their daily routine. However, with the help of retirement planning, you can overcome your loss of income by saving and investing your money in the right investments. It offers you the freedom to live your golden years comfortably without having to rely on others for financial assistance. With robust retirement planning, you can live a financially independent life and build a substantial retirement corpus. The corpus allows you to cover your non-discretionary expenses (like groceries, electricity, gas, healthcare, etc.) as well as your discretionary expenses (such as travel, dining out, shopping, etc.). It also enables you to handle any financial emergencies that may crop up like unexpected medical costs, home repairs, car repairs, and more.
Retirement planning should be undertaken by every individual regardless of their income, age, net worth, future goals, or family needs. It is a vital component of any financial plan as it has a significant effect on your overall standard and quality of your life. This is why you must seek professional guidance at the time of drafting a retirement plan. If you need help to design a customized retirement plan as per your future financial needs and goals, reach out to a retirement advisor who can advise you on the same.
In this article, we will discuss the importance of retirement planning, how retirement advisors assist you, and what criteria you should consider when selecting a local retirement planner to guide you.
Why is retirement planning important?
Retirement planning can be helpful in several ways other than simply saving for future retirement expenses. These are:
1. Can help make taxation planning easier:
In the rush to create wealth, a lot of folks tend to neglect the subsequent impact of taxes on their accumulated wealth. Having a high income is beneficial as it allows you to live comfortably and cover all kinds of costs including any unforeseen ones. However, a high income also increases your taxability and may adversely affect your cash inflows. Thus, it is critical that you take into account how your retirement income will impact your taxes during your retirement years. For instance, if you choose a traditional Individual Retirement Account (IRA), herein, you contribute pre-tax dollars and subsequently, your withdrawals are taxed in retirement. But if you invest in a Roth IRA, herein, you make contributions from your after-tax dollars that allow you to make tax-free withdrawals in retirement provided you are 59.5 years of age and have held your account for a period of five years.
All these considerations are taken into account by retirement planners before choosing a particular instrument for you. For example, a big factor in choosing between a traditional and Roth IRA depends on whether you foresee yourself in a higher tax bracket during your golden years or not. If you expect to pay higher taxes in retirement, a Roth IRA would be ideal for you as you will not have to pay any tax on the withdrawals. But if you expect to pay lower taxes in retirement, then a traditional IRA would be a better option for you. A retirement planner can help explain the finer differences to you and guide you on how to save and invest to meet your future financial needs and goals.
2. Can help plan your withdrawals better:
There are a number of reasons why you need to carefully plan your retirement account withdrawals. The timing of withdrawals matters a lot as it sets the course for the rest of your retirement and can significantly affect your overall earnings too. Take Social Security benefits for example. You can start withdrawing your benefits upon reaching your full retirement age, however, if you delay withdrawing till you reach 70 years of age, you can boost your paycheck by an average of 7.4% per year. This is a substantial increase. A retirement advisor can calculate the exact number of years you need to delay collecting your check to maximize your benefits.
Additionally, there are different sets of rules for withdrawals for different retirement accounts. Consider a 401(k) account. Herein, you can make penalty-free withdrawals upon reaching 59.5 years of age. However, if you make a withdrawal before the age of 59.5, you would be liable to pay a 10% penalty. Moreover, the Internal Revenue Services (IRS) mandates that you take Required Minimum Distributions (RMDs) from your retirement accounts starting from 72 years of age. That said, you are afforded certain exceptions wherein you can make penalty-free withdrawals for qualified expenses. These exceptions are:
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- Loss of job
- Covering higher educations expenses of a child
- Suffering from a permanent disability
- Medical costs
A retirement planner can account for all such rules and exceptions and plan your withdrawals efficiently. Doing so would allow you to avoid paying any penalties and minimize your taxes too.
3. Can help offset any unforeseen expenses:
An unforeseen expense can throw your well-planned retirement strategy for a toss. This is why it is critical that you prepare an emergency fund as a part of your retirement plan. You may be forced to use up a chunk of your retirement savings prematurely to cover any instances of theft, home repairs, medical emergencies, a child or relative requiring financial assistance, etc. This may lead to having insufficient funds for your remaining years of life. However, you can offset this predicament by saving for an emergency corpus. You can consult with a professional financial advisor who can recommend an appropriate investment instrument for saving that not only offers growth on your money but is also highly liquid. Generally, it is recommended that you must have three to six months' worth of household expenses in your emergency fund. You could also explore different insurance plans such as homeowners insurance, medical insurance, etc., to cover any emergency costs that you may face in the future.
4. Can help offset the impact of inflation:
When planning for retirement, you need to factor in the cost of inflation. Due to rising inflation, the cost of goods and services increases while at the same time the purchasing power of the dollar decreases. This may lower the value of your retirement savings requiring you to save a larger sum of money. However, retirement planners can help offset this by choosing appropriate investments for you that can offer enough growth to beat inflation. Doing so ensures your savings grow at a high rate offsetting the impact of inflation on them.
5. Can help lower financial anxiety and stress:
Planning helps prepare for the unexpected so that you can manage any unforeseen events. Having a retirement plan in place allows you to take care of everything starting from taxes to withdrawals, insurance, medical costs, higher education expenses, emergencies, etc. It offers you comfort and confidence in the knowledge that you will have enough funds to live your retirement years comfortably and take care of your family. You can always go ahead and consult with a retirement advisor who can create a well-diversified investment and retirement savings plan for you that will offer you peace of mind.
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What are the different kinds of financial advisors that you can hire?
You can reach out to several different kinds of financial advisors who can help you create a substantial retirement corpus. These advisors differ in many aspects such as the kind of services they offer, their areas of expertise, how they work as well as how they charge remuneration. Let us go through the different kinds of financial advisors that you can hire:
1. General financial advisors:
These advisors can offer guidance on several areas of financial planning such as retirement planning, debt management, investment portfolio diversification, tax planning, succession planning, estate planning, and more. You can either go with an advisor who offers specialized services such as a retirement planner or tax manager; or hire someone who can study your finances in detail to give you more comprehensive advice.
2. Wealth managers:
Similar to general financial advisors, wealth managers work exclusively for high-net-worth clients. They are considered ideal for wealthy individuals who have amassed extremely large estates and highly valuable assets and investments.
3. Fee-only advisors:
Fee-only advisors charge a flat fee to their clients based on the number of hours they have worked for you. The fee can be charged either on an hourly, weekly, or monthly basis. These advisors also work on a fixed percentage of your Assets under Management (AUM). The typical rate of the fee charged is 1-2% of AUM. Please note that the percentage of fees decreases with an increase in AUM. Fee-only advisors are fiduciaries meaning they are legally bound to put your interests before their own.
4. Commission-only advisors:
These kinds of advisors charge a commission based on the financial products or services they may recommend you buy. For example, if you make an investment of $5000, they may earn a commission of $500 on it. Since commission-based advisors are not fiduciaries, they may not always recommend an investment that suits your financial goals but rather one that may earn a higher amount of commission.
How to find the right retirement advisor near you
Every individual has unique financial needs and goals. A retirement planner assesses your risk appetite, your savings, and investments target, and your retirement goals to best advise you on how to achieve your objectives. Some retirees may wish to travel during their retirement while others would like to spend quality time with their family or contribute towards their grandchildren’s higher education costs.
There are certain steps that you can follow in your hunt for a suitable advisor who matches your needs:
1. Understand your needs:
The biggest hurdle when it comes to finding the right advisor is that you are unsure about your present and future financial needs. Once you gain clarity about why you require the services of a financial expert, the rest of the pieces of the puzzle would fall into place. For example, are you looking for someone to boost your retirement savings, help lower your taxability, or diversify your portfolio?
2. Carry out thorough research:
DO not blindly trust recommendations made by your family and friends. Remember, someone who may be the right fit for them, may not be the best choice for you. Find out about any local retirement planners in your area. You can use certain online tools such as an advisor match tool to find qualified advisors. Interview prospective advisors to find one who best matches your needs and has the right credentials, certifications, experience, etc. Once you have narrowed down your options, select the best financial advisor from the remaining advisors.
3. Ensure the chosen fee structure is suitable for you:
Retirement advisors primarily use two kinds of fee models i.e. fee-based and commission-based to charge their clients. At the time of hiring a professional, do go through the pros and cons of their fee structure carefully before moving ahead with your decision. Find out how the fee model impacts your budget and if the tradeoff is worth the investment.
Retirement planning is a long-term process wherein the sooner you start saving, the better off you will be in terms of reaching your retirement savings target. Do not delay hiring a retirement advisor until you are only a few years away from retirement. Hire one when you are young so the advisor can help you create a customized retirement plan that will allow you to earn a substantial sum of money.
To conclude
Through retirement planning, you invest and save funds to ensure you have comfortable and stress-free retirement years. It allows you to build a financial safety net wherein you can meet your living expenses without having to look for help from others. Herein, retirement advisors play an important role by helping you reduce your taxes, increase your returns, minimize penalties, be prepared for emergencies, and more. Try and find retirement advisors near you who can help you achieve your goals with minimal hassles. Further, ensure that the advisor complements your investment philosophy and suits your budget.
If you want to get in touch with a fiduciary advisor who may help you create a customized retirement plan to boost your savings and reach your savings target, use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.