Ask the Experts: Guide to Wealth Management

Our panel:

• Chuck Stephen, ChFC, Founder and Managing Member of Glenwood Investment Group LLC
• The team at BerryDunn Wealth Management

Q: When should I begin investing and what do I need to plan for?

BerryDunn: You should start investing immediately, if you haven’t already. The earlier you start, the better off you will be in retirement. Here is a hypothetical example: Joseph invested $4,000 per year for 25 years. Susan invested the same amount for 10 years. However, because Susan started saving 10 years earlier she has almost $50,000 more ($343,414) than Joseph ($293,935) at age 65. The important thing is to get started as soon as possible and save as much as you can as early as you can.

If your employer offers a retirement plan such as a 401(k), enrolling in the plan is a big step towards preparing for retirement. 401(k) plans enable you to save for retirement in a disciplined way but with ease and convenience. Many employers match contributions to a specific dollar amount. If a match is available to you, don’t lose out on “free money”. Do your best to contribute enough to get the full match but don’t stop there. Continue to increase your contributions over time.

Planning for retirement entails more than saving. It’s important to consider when you want to retire and what you hope to do in retirement. Once you have answered those questions, you can better estimate the amount of retirement savings you’ll need to support your lifestyle. Here are a few factors to keep in mind:

As life expectancy for many people stretches into the 90s and older, retirement assets must last longer than in the past.

Inflation will reduce your spending power over time.

Medicare won’t cover all of your health care expenses. A 2016 survey by Fidelity Investments found that a 65-year-old couple without employer-provided health insurance will need approximately $260,000 throughout retirement to cover costs for medical and dental care, long-term care, and over-the-counter medications.

There’s a lot to consider as you prepare for retirement, so it’s wise to begin planning well ahead of time. Plan to review your retirement savings on a regular basis and save more when you can.

Q: What are some of the most important elements to consider when I start investing, and how can these help me avoid common pitfalls?

Chuck Stephen: When investing you should always consider your risk tolerance, account taxation, and your level of diversification.  Understanding your risk tolerance is the first step in making better investment decisions.  Far too often we see clients that hold investments much above or below their comfort level without knowing it.  The factors that determine your risk level are time horizon, liquidity, and your overall comfort with market volatility. Your risk tolerance will change over time and as retirement approaches, it’s crucial that you make the appropriate adjustments for a retirement ready investment portfolio.

Another element of investing to consider involves the type of investment account you hold and understanding the tax consequences of the account.  There are various types of investment accounts that all have different features. The most important factor is how the investment gains in the account are being taxed.  Understanding the taxation of your investment accounts will help you anticipate when and how much tax you are going to pay. Uncle Sam will always get his share but creating a tax efficient portfolio will benefit you and your family in the long run.

Every efficient portfolio should be well diversified.  Creating a portfolio with a few stocks or funds will significantly increase your risk and cause more volatility.  It is important to have a well-diversified portfolio in order to reduce your investment risk while maintaining the potential for a positive return.  Investing in different market sectors will help you outlast the ups and downs of the market for long term success.

Q: How do I estimate the amount of money I’ll need to retire, and how do I begin achieving that goal?

Chuck Stephen: Determining the amount needed in retirement is a very complicated calculation considering many factors.  Begin with a retirement income strategy to determine where sources of retirement income will be generated and the tax consequence each creates.  When it comes to retirement planning, there is no cookie cutter approach to determine the magic amount needed.  Everyone has built their wealth in different ways, however knowing how each of your financial assets and sources of income impact each other can lead to better financial decisions.  We work with clients to understand their goals and attempt to create a clear and defined plan before and during retirement.

The best solution to determine the amount needed in retirement is based on creating a comprehensive financial plan. By creating a financial plan with an advisor, you will be exposed to how your retirement plan is impacted by investment changes, insurance needs, tax liabilities and other factors.  For those who have saved for retirement their whole life, it’s important to know you are making the best decision for you and your family.

Q: I got started investing in my 401(k) late. Is there anything that I can do?

BerryDunn: Yes, there is. Once you reach age 50, you can take advantage of higher contribution limits. After 50, you can contribute an additional $6,000 per year to a 401(k) for a total of $25,000 per year. If you contribute to a Traditional or Roth IRA, you can save an extra $1,000 per year for a total of $6,000. In addition, you can always save for the future outside of traditional retirement savings vehicles in after tax investment accounts, annuities, and bank savings accounts.

Besides taking advantage of higher savings limits in retirement plans and other savings vehicles, it is important to make sure that you optimize social security benefits for you and your spouse. Conventional wisdom often suggests that individuals take social security benefits as soon as possible, typically at age 62. However, by choosing to take benefits early, you may well reduce your retirement income by tens of thousands of dollars over the course of your lifetime. And, if you were born by 1954, there may be claiming strategies available to you that permit you to ensure an even larger benefit for you and your spouse for your entire retirement.