Understanding The Phases Of Financial Planning

Unless you’ve won the lottery and a dump truck pulls up each year plopping a million dollars in your front yard, you’re like the 99.9% of other people in the United States who need to accumulate assets to then be able to distribute that money over your retirement years. Understanding where you are at on your financial journey and where you need to be in order to live the lifestyle you envision requires a financial plan.  Let’s determine if you are an accumulator or a distributor or possibly both.

START WITH YOUR AGE

The first and easiest way to know where you on your financial planning journey is your age. Most people under 50 are going to be in the accumulation phase of their financial plan.  The folks in this age range are typically in the work force, building and acquiring assets to prepare for retirement.

It goes without saying that the earlier you begin saving the better opportunity you have to take advantage of compounding interest and build a substantial nest egg. A good rule of thumb is to pay yourself first by putting back at least 10% of your gross pay per month and doing this as soon as you get your first real job. If you can bump that number up to 20% you can expect to have the option of retiring at least 5 years earlier. It’s a balance between sacrificing for retirement when you are young, versus being work free earlier, albeit, in your later years.

Everyone should also be taking advantage of the free money from their employers 401k, 403B, TSP or any other retirement plan match that is offered. Every year billions of dollars are left on the table by individuals not putting in enough to their retirement plans to take full advantage of company matching funds.

RETIREMENT LIFESTYLES

If you ask 10 people what life looks like for them in retirement you can expect to get 10 different answers. Similar themes or concepts are present, but what retirement looks like to one investor vs another there is often a gap wider than the Grand Canyon.

We have clients who have lived grossly below their means their entire life and have no desire to change that in retirement. They are simple people, they enjoy their homes and the cities in which they reside, but do not possess a wanderlust to travel or explore outside of what is known to them. That’s perfectly acceptable for their retirement – they live with peace of mind and will ultimately pass down a nice inheritance to their loved ones.

Conversely, we have risk-taking, adventure pursuing, “not all who wander are lost” clients who have saved for 30 or 40 years and want to have a big blowout celebration in their golden years. Their goal is to write their last check or spend their last dollar on their burial and enjoy an experienced based retirement to the fullest until then.

To retire when you want, the way you want make sure and indoctrinate these three accumulation phase practices into your everyday life: 

3 KEYS TO ACCUMULATE WEALTH FASTER

Be aggressive- When you begin your career, your investment portfolio should be aggressive. When you are in your 20’s and 30’s, you have the gift of time in the stock market.  Your investments can easily sail through a downturn even if it takes multiple years to fully rebound. Set up your financial portfolio to take higher risk that can result in a higher return on your investment.

Don’t accumulate debt- Start on the right foot by refusing to spend more than you make and only buy things you can pay cash for. It can be painful but deny yourself the new car, vacation or latest gadget. A house payment is the only debt you should carry if you want to be able to accelerate your wealth faster than your debt-laden friends around you. Remember- you can’t build a financial portfolio if you have nothing to put into it!

Say Yes more often- Taking chances on experiences or workplace projects could render the biggest opportunities of your life. Many believe coming into a new position they need to toe the line and just do as asked. Instead step out, make bold suggestions and be willing to put forth the effort required of those ideas.  It likely will lead to great advancements in your career and your bank account – propelling your wealth accumulation higher, faster.

I’M OVER 50, BUT STILL ACCUMULATING

Just as each person has a different view of what retirement looks like, everyone also has their number or age at which they’d like to retire. For some it’s 55, others 62 and some people never want to retire. They want to be working until the day they die and accumulation never has to stop if you are of the mindset that you want to work forever.

Unfortunately life doesn’t always go the way we intend. Most people want to build a retirement plan, follow it and then retire at that age they outlined. However, health issues can quickly change our perspective on money versus time.

For the purposes of most readers, let’s focus on those who intend to retire. Once you have hit your number you could still be accumulating but also be in transition to the distribution phase of financial planning. Let’s examine the crossover.

ACCUMULATION TO DISTRIBUTION TRANSITION

When choosing to retire, some may continue accumulating financial assets while they also begin looking at the distribution of their investment accounts to sustain them over decades in retirement. Some retirees hold great pensions from companies or the military that they worked for, for decades. Others continue accumulating assets through real estate income on a monthly basis. However, no one wants to retire and then immediately experience a reduction in lifestyle.

For most, when retirement arrives accumulation slows and they learn to shift their investing strategy to make sure they do not outlive their money.  The number one fear of retirees, regardless of the amount of assets they possess, is running out of money.

The investment philosophy and strategies used during the accumulation phase are not the same ones that should be used in retirement. Conversely, using the same financial advisor that you began with in your 20’s may not be the right one to use in or near your retirement years. When the market falls, if your advisor tells you things like “Just sit tight because we’re in this for the long haul” or “Ride it out and everything will be fine because the market always comes back”, it’s time for you to get a 2^nd opinion.

SAFE INVESTMENTS > RISKY INVESTMENTS

In retirement, people need to shift their growth mindset of the accumulation phase to more of a preservation strategy in the distribution phase. The tools used to get to retirement are typically not the same tools used in retirement. Asset gathering financial advisors serve a sound purpose for the accumulation phase of life. However, the most common problem we see is pre-retirees coming into our office with portfolio holdings that have very high exposure to risk and often containing products with higher fee structures than they should be holding in retirement.

Investors need to transition to a financial advisor who is a distribution specialist at this point. This is our focus at Strategic Wealth Designers. We are distribution specialists and our team works hard to make sure that our clients’ portfolios are protected with safety nets put in place for when (not if) a stock market downfall occurs. We often say that in retirement a big market gain won’t help you as much as a big market loss will hurt you.

It is also critical that investors understand the fees, risk and tax exposure that their investment accounts are potentially facing in retirement.

INVEST IN THE 21ST CENTURY

Investment portfolios must evolve to fit the needs of a retiree in way that is different from when they were built decades before. Time changes your needs and expectations, and complacency can cost you tens or even hundreds of thousands of dollars over the course of your retirement.

Avoid saying ‘we’ll look at that next year’ or ‘I’ll think about making a change after the election’. Engage and interact with your portfolio on a regular basis and understand that what got you to retirement will generally not serve you as well in retirement. You only get one shot at getting the distribution phase right and there’s no “do-over” retirement that exists.

As a Retirement Income Specialist, I specialize in the distribution phase of financial planning and work with hundreds of people every single year to make sure they are getting their retirement plans built correctly. Lastly, no matter who you choose to work with, make sure they are an independent fiduciary financial planning firm!