Many people put off saving for retirement, thinking there’s just not enough money at the end of the month, or often focusing on current lifestyle.
“They tell themselves they’ll start putting something away for the future as soon as there’s extra,” says Chad Vavpetic, Regional Vice President at AXA Advisors, LLC.
“The problem is, it never gets easier. Demands on your money will always expand to consume your full income, if you allow it to happen.
“It’s common for young professionals starting out now to have tens of thousands of dollars in student loan debt. They often feel like, ‘Retirement is 40 years off, I can’t start thinking about that now. I have to pay off these loans, buy a car, get my own place.’ That’s a huge challenge. Time is everything when it comes to accruing sufficient retirement assets, and starting early is key, even if you start saving a relatively low percentage of your income initially.”
Smart Business spoke with Vavpetic about the common risks and pitfalls related to retirement planning.
What are some mistakes people make when projecting how much money they will need in retirement?
The first mistake for most is failing to understand that saving for retirement is no longer the responsibility of your employer or union through a defined-benefit pension plan. It often now falls completely on you. Many are not saving enough in defined contribution 401(k) or 403(b) plans to make up for the reduction or absence of that traditional pension.
Even those who are committed retirement savers may not be adequately prepared for two of the primary risks facing financial security in the golden years, inflation and longevity. While inflation has averaged 3.18 percent over the last century (inflationdata.com), many financial professionals believe that the fiscal policy the federal government has employed since 2008 will likely result in the devaluation of the dollar, growing the cost of living at a faster-than-normal rate in coming decades. That means more retirement dollars will be required just to maintain preretirement lifestyle, not to mention the added expense of traveling to visit the grandchildren or that winter home in Florida. Couple inflation risk with increased life expectancies, and the possibility of outliving retirement assets becomes a very real concern.
What about tax liability?
Tax liability is one of the biggest deterrents to accumulating retirement assets; you need a strategy that is conscious of that. Traditional pretax and Roth retirement contributions are very simple and powerful ways to save on a tax advantage basis. There are also more advanced strategies, often used when IRAs and employer-sponsored options are limited or have been phased out due to income level. Saving on a tax-advantaged basis is essential.
Tax liability is also a major concern at distribution time. For example, cashing in a big chunk of your retirement to pay off low-interest debt like a mortgage in lump-sum fashion could have big tax implications and may not be the most advantageous decision. As you transition into retirement, it’s more about cash flow than assets and liabilities. Having a sound distribution strategy is extremely important.
Is it possible to successfully plan your retirement on your own?
Retirement planning is no longer a do-it-yourself endeavor. Markets are as volatile as ever, as has been evident in recent weeks. Tax laws and regulations are more complicated than ever. Financial products are increasingly advanced, as the industry continues to innovate in response to the changing economic environment.
Somebody has to be knowledgeable of all of this. You can either become an expert, or work with someone who has that knowledge. The need for qualified professional advice has never been greater.
A good adviser can help you design a strategy that serves your individual goals and addresses your concerns, while seeking to both protect and maximize your retirement income.
Insights Wealth Management is brought to you by AXA Advisors, LLC
Chad Vavpetic offers securities through AXA Advisors, LLC (NY, NY, 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers annuity and insurance products through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. 107310 (09/2017)