Financial Planning, Retirement

The Importance Of Financial Planning

6/8/18 8:00 AM

iStock-119520974.jpgOnly around half of Americans expect to have enough money to live comfortably in retirement, according to a recent Gallup poll. A lack of savings is of course the main factor behind such pessimism, and an updated study by the Federal Reserve alarmingly found that not even two-fifths of pre-retirees believe that they are setting aside enough money to achieve their old-age financial goals.

However, another issue that is probably weighing on Americans’ perceived readiness for retirement is a lack of planning, as evidenced by a new Charles Schwab survey which found that only one in four U.S. adults currently have a written financial plan. That is a problem because simply setting aside money is not always enough to guarantee a financially secure retirement. Detailed projections of potential old-age outlays are also needed to help determine early on how much money will likely have to be saved in order to achieve a desired standard of living in retirement. Such knowledge enables people to more confidently assess whether they are on track for their ideal retirement and quickly identify any necessary adjustments to their rate of saving.

Moreover, financial plans should undergo routine checkups to see if old-age spending projections, and in turn savings targets, need to be revised due to unforeseen life events or changes in retirement lifestyle goals. Regularly working with an advisor can help a lot with such calculations, and financial professionals are also able to provide assistance with the investment of your retirement savings. That would likely be a very valuable service for the 60 percent of Americans in the earlier-mentioned Federal Reserve study with a 401(k) or similar self-directed retirement savings account who said that they have “little or no comfort” in managing their investments on their own.

More importantly, there appears to be a correlation between having a financial plan and positive money habits. For example, respondents in the Charles Schwab survey with a written plan had a much higher likelihood than “non-planners” of paying bills on time, saving money each month, establishing an emergency fund, and eliminating debt. Planners were also more likely than non-planners to demonstrate smart investment behaviors, such as constructing a diversified portfolio, rebalancing their holdings as needed, and taking into consideration transaction costs and other fees. Schwab’s Terri Kallsen added that “Planning is critical to achieving any goal. It’s like establishing an exercise regimen to get in shape − we need to take the same approach to keep our finances in good health and on track.



Sources: Gallup, FRBG, NAPA, Charles Schwab

Post author: Charles Couch