Considerations For Starting Your Financial Plan

According to a 2021 Charles Schwab study, the majority of households without a financial plan don't have one because it's too complicated and/or they don't have the time to create one (TCRP solves those problems!). Yet, of those that have a written plan, 54% feel "very confident" about reaching their goals, and another 18% are "certain" that they will reach their goals. It's clear that having a tangible plan to follow can provide a great source of comfort and will help to keep you on the right track.

At the very least, everyone over the age of 30 should be planning for retirement by having a written financial plan.
No, that's not too early if you want to reap the benefits of compound interest, capital appreciation, saving smaller amounts for longer rather than greater amounts later in life, etc.. Starting at a younger age also allows for more leeway with having some generalities in your plan as opposed to the specific final numbers that you will need closer to retirement. As you get older, it becomes more and more important to gradually replace any generalities with specifics. In your thirties it may be early to worry about accumulating a specific amount before retiring, but it's not too early to establish a solid savings plan (i.e., saving 4-8% of your salary to make sure that you get a full company match that may be offered, and then increasing that % on a regular basis to reach your plan maximum as soon as you can). A certain amount of debt is common in your thirties and forties as you pay off student loans, purchase a car or house, raise a family, etc. But holding no debt after fifty (except for maybe a mortgage), or certainly at the time of retirement, should be a specific goal. Every penny of debt that you hold, at any point, is stealing from your savings by restricting the ability to save as much as you need/want to, and this becomes more and more urgent as you get closer to retirement.

No matter what your age is, the following are the starting points for any comprehensive financial plan, even before digging in to specific numbers:

• An emergency fund is job #1. This is a necessity and should be sufficient to pay at least 6 months of expenses (a year is even better). This amount should not be included in a financial plan itself as it is designated only for an unexpected emergency (e.g., job loss, urgent medical care, etc.), not for anything else. This is meant to help protect you from using savings meant for your future.

• An itemized budget that includes all needs and wants (everything!): Food, clothing, fuel, credit card debt, college savings (for any children), travel expenses, car maintenance, home maintenance, dry cleaning, fun activities ....).
This is the nucleus of any plan.

• Short-term (within 5 years) and long-term (10 years+) goals. Be specific. Establishing small goals that guide you towards larger goals will help keep you interested, show progress, and make achieving longer term goals seem that much more possible. If you are able to take many small steps toward a goal, a giant leap of faith won't be necessary.

• Percent of salary to be saved to a 401k/IRA each year. Make sure that it is enough to get the full company match,
if offered. Plan to increase the percent saved each year until you reach the maximum allowed.
It's pre-tax savings, make the most of it!

• Goal to have all debt paid off before retiring. It's straightforward - the less expenses that you have, combined with the most Social Security and/or pension that you can generate, the less savings you will need during retirement (but still build in a healthy margin of error!).

• A plan for health care in retirement. Medicare does not pay for everything and it is not free! Make sure to research all potential costs related to your specific (anticipated) needs.

• Is your intent to be able to spend all of your savings before you die, save every penny you can for as long as you can, or would you like to leave certain amounts to family or other beneficiaries/charity? Each of these goals can affect your savings and spending strategy differently so it will help to know what you want.

• Be aware of all potential taxes - on wage income, Social Security (potentially), interest/returns on savings, taxable 401k/IRA withdrawals and RMD's, etc. The prospect of paying taxes will always be with you!

• When would you like to start claiming Social Security benefits? When might you need to start claiming them? Be aware of how claiming at different ages (age 62 to age 70) will affect your benefit amount, and even Spousal and Survivor benefits, if married.

• Plan on a realistic and conservative return rate for invested savings, based on your investing style, your risk tolerance, and your actual returns achieved, not historical market returns. Do you plan to take less investing risk in retirement?

One thing to avoid at any age are the generic benchmarks and rules of thumb that are often presented as "advice".
"Plan to replace 80% of your income in retirement"? Why? Does that really apply to you? If you make $100k/year and live off of 50% of that, why would you need to replace 80%? If you are spending 80% of your income now, but your mortgage is 25% of that, and you will pay off that mortgage before retiring, will you still be spending $80k/year in retirement?

"Plan to withdraw no more than 4%/year from savings (or 3.5%, or whatever the popular % of the day is)"? Why?
Shouldn't a withdrawal % depend on how much you have in savings, how much it is earning, what other income
you have, or how much you need to live on? In general, if you earn 3%-5% on savings (very reasonable) you can certainly withdraw 5% or more/year (inflation adjusted) for 20-25 years and not run out of savings.

You get the point - there are no "rules" that you need to adhere to. These common pearls of wisdom were created with good intent, but unless you examine all of the assumptions involved - and there are quite a few - they can easily be misleading and very inaccurate. Pay no attention to the man behind the curtain (Wizard of Oz reference), only pay attention to the specifics of your situation. Create an individualized financial/retirement plan that meets your individual needs, and that you will be able to count on for decades to come.


Older Post Newer Post