Why Not Having a Financial Plan Could Be Costing You Money

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Published by Daniel Morrison, Founding Partner and Wealth Advisor

 Have you ever gotten the urge to organize/declutter/deep-clean your house but—after looking around—felt overwhelmed? Or you start in one room and quickly find yourself tearing up every room in the house? Did you wise up, make a list, and go through your home room by room, crossing off your list as you went?

Most people feel the same way about their finances. Once they start examining one area, it leads to another, then another, and you can very quickly become overwhelmed.

If you’ve been putting off your financial plan because you don’t want to get lost in the maze of your finances, consider these 5 reasons why you should stop procrastinating and start planning today.

1. You Should Be Saving More

The first reason you shouldn’t put off financial planning is that you’re probably not saving as much as you should. That’s not to say that the savings you do have shouldn’t be celebrated. But no matter the amount you have, you need to be sure it will be enough.

If you plan to retire in your mid-60s, your retirement savings may need to carry you through 30-plus years. Not to mention rising inflation that will decrease the value of your savings over time and the additional expenses you will likely encounter along the way. A study by the Center for Retirement Research estimated that the median retirement savings of Americans age 55-64 is $120,000,[1] yet the average retirement cost is nearly $46,000 per year![2] At that rate, a savings of $120,000 will only last 3-4 years.

The best way to avoid running out of money in retirement is to work with a financial professional to understand what your savings can handle. Contrary to popular belief, you cannot use a multiple of your annual income to determine how much to save. This is why it’s so crucial to plan ahead. The sooner you understand your need, the more options you will have and the easier your goals will be to accomplish.

2. Healthcare Costs Keep Increasing

If you’ve ever held a hefty medical bill in your hand, you aren’t alone. Healthcare costs in America are among the highest in the world.[3] And as you age, you will likely require more healthcare services. According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will need about $300,000 saved to cover healthcare costs in retirement.[4] Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs.

Given the events of the past two years and continuing inflation, it’s more important than ever to start preparing for the ever-increasing cost of care. The longer you wait, the less options you’ll have. Working with an experienced professional may help you evaluate your options and build a long-term plan for healthcare.

3. It Takes Years to Implement Tax-Savings Strategies

Another reason not to put off financial planning is that if you don’t start early, you’ll miss out on several tax strategies that take years to implement, including:

Tax-Advantaged Retirement Savings

If you’re in a high tax bracket, being able to save for retirement with pre-tax dollars is a great advantage because pre-tax contributions reduce your taxable income and ultimately reduce the amount of taxes you owe. This strategy could save you thousands of dollars in taxes each year. The earlier you start, the more you’ll save over the course of your career.

Roth Conversions

Roth conversions help to increase your retirement savings and decrease your long-term tax liability by transferring funds from a pre-tax retirement vehicle (traditional IRA) to an after-tax account (Roth IRA). This allows your money to grow tax-free for as long as you’d like, and required minimum distributions (RMDs) are avoided as well.

Withdrawal Strategies

When it comes to withdrawing from your retirement accounts, how you take your distributions can make all the difference. Each retirement asset (employer-sponsored accounts, Social Security, traditional IRAs, etc.) has different tax characteristics. Creating a withdrawal strategy may help lower your tax burden by structuring withdrawals from each income source in a tax-efficient way.

To properly implement these strategies and more, a long-term understanding of your full financial picture is required. Putting off financial planning can leave you stuck with a huge tax bill that could have been avoided.

4. You’re Losing Out on Compound Interest

Just as saving early allows you to take advantage of massive tax savings over time, there is a compound effect that occurs with the money that is invested as well. The money contributed to your retirement account each year will grow exponentially over time, but the key part of that equation is time.

A single penny that doubles every day for a month may not seem like much on the surface, especially when compared to $1 million up front. But by the time the 30th day rolls around, you will have over $5 million in pennies. This same concept can be applied to your retirement account, but because retirement investments are at the mercy of the highs and lows of the stock market, it will take more than 30 days to see that kind of growth.

If you wait to invest, you are missing out on growth year after year, and the resulting loss of earnings may be substantial. Not to mention the potential for loss when you try to invest yourself without the proper advice and guidance of a professional. We’ve found that many clients are often invested too conservatively and miss out on the opportunity for significant growth in even just a slightly riskier portfolio.

5. Financial Planning Can Alleviate Stress

Do you feel 100% confident about the myriad of financial choices you make day in and day out? Have you encountered more complexity as your assets have grown? Partnering with a financial professional may be able to help alleviate the stress and anxiety that comes from trying to figure out your finances.

Think about all the time you spend worrying over finances and whether you are saving enough money. Are those thoughts preventing you from making great memories and actually living your life? For many of our clients, the answer is yes. But it doesn’t have to be that way.

Financial planning may be able to help alleviate the stress that comes from not knowing where you stand or how to work towards your goals. It may provide clarity by defining a path from point A to point B and allowing you to get the most out of your life along the way.

Get Started Today

Don’t let your finances turn into a maze of confusion. Putting pen to paper may help you work toward certain aspirations you’ve also been putting on the back burner. Consider working with an advisor who can help you simplify the complex and move forward with confidence. Contact our office by calling 410-821-6724 or emailing info@jacobwilliam.com or schedule an appointment at https://www.jacobwilliam.com/insights/#contact.

About Dan

Daniel Morrison is a Founding Partner and Wealth Advisor of Jacob William Advisory, a wealth management firm whose sole mission is to service their clients’ needs beyond their expectations. Dan Morrison has 27 years of industry experience, and for the past decade, he has been committed to building Jacob William Advisory into one of the foremost wealth advisory firms. Dan graduated from Towson University with a bachelor’s degree of finance in economics and obtained his master’s degree in finance from the University of Baltimore. He is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Chartered Financial Consultant® (ChFC®), Chartered Life Underwriter® (CLU®), and Chartered Advisor in Senior Living® (CASL®) designations. He and his wife Beth reside outside of Baltimore, Maryland, and have three wonderful children. Dan is involved in his church and he enjoys spending time with his family, playing golf, and sailing. A good book is also never far from his reach. Learn more about Dan by connecting with him on LinkedIn.

 

This article is not intended to provide specific legal, tax, or other professional advice.  For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

The hypothetical investment results are for illustrative purposes only.

Converting from a traditional IRA to a Roth IRA is a taxable event.

[1] https://smartasset.com/retirement/average-retirement-savings-are-you-normal

[2] https://www.financialsamurai.com/the-average-spending-amount-in-retirement-is-surprisingly-high/

[3]https://www.investopedia.com/articles/personal-finance/072116/us-healthcare-costs-compared-other-countries.asp

[4]https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

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