Planning for retirement is a dynamic process that involves decades of managing your life savings in various investment vehicles until you retire. While many invest in 401 (k), real estate, bonds, and stocks, doing so without knowing the underlying principles of these asset classes often leads to poor returns and even losses. Additionally, the impulse selling and buying of assets during market turmoil could derail a well-planned retirement card.
There are more important questions that many Americans do not have answers to. How much do you need for your retirement? When to start saving When Can You Really Retire? Some say to save 10 times your annual income at age 67 is decent enough to navigate smoothly into retirement, but that estimate could change dramatically over the next two decades. Many aspire to retire before age 55, but the actual average retirement age is well over 60. This huge gap between reality and retirement expectations could be attributed to several factors:
Start saving for retirement late
Personal debt of US households nearly hit a record high of $ 15 trillion in the second quarter of 2021. Student loans, credit cards and personal loans alone have kept Americans from saving early in life. which cost them precious years of compound interest on investments. The pandemic may have played a role in the sharp rise in personal debt. TheBalance estimated that 50% only had $ 250 in disposable income left after paying their bills and monthly installments.
Excessive dependence on social security
Thinking that Social Security benefits will protect you in retirement could create an illusion of financial security throughout your working years. While the Social Security Administration (SSA) allows eligible people to apply for benefits from age 62, you actually receive less monthly income than those who claim at age 66. An SSA report said the average monthly benefit in 2021 was $ 1,544 with more than 65 million workers receiving a staggering $ 1,000 billion in benefits this year.
In addition, the report mentions that the number of Americans aged 65 and over is expected to increase from 56 million currently to 78 million by 2035. This scenario could force sub-Saharan Africa to cut benefits or increase taxes in order to respond to a growing population The benefits of SSA in the future. The big picture is that a secure income stream after a certain age could lead many people to a comfort zone where they might not be looking for higher returns through different investment vehicles.
Attach emotional value to money
Watching your life savings plummet during market downturns is no easy task. Unguided investors with little knowledge of market dynamics often fall prey to market swings, where they sell investments for fear of losing more money during a downtrend. If you withdraw from your 401 (k) prematurely, for example, you could break the compound interest momentum. It could push back your retirement goals for years.
Additionally, a National Financial Educators Council survey found Americans lost an astronomical $ 415 billion in 2020 due to lack of financial literacy. While emotional money movements certainly have a role to play, there are several factors such as hidden charges that increase with your assets or the attempt to synchronize the market, among others, could make your current financial crisis worse.
Importance of Guided Retirement Planning
An April 2020 Betterment survey found that 52% of respondents believed they needed to tap into long-term savings over the next twelve months. More than 36% of people under 20 expected a delayed retirement due to the pandemic, while 37% of people aged 45 to 64 did not know how their investments were faring during the crash scholarship holder.
In contrast, 650 billionaires increased their collective worth by $ 1,000 billion during the COVID-19 pandemic, bringing their cumulative value to over $ 4 trillion. The bottom line here is that good financial planning could grow your retirement funds over time, regardless of momentary but inevitable fluctuations in the market.
When planning for retirement, people tend to think about choosing the right mix of stocks and bonds, exploring different asset classes, and monitoring and adjusting their portfolios to create a fortune they will not survive. . It is crucial to understand that an important aspect of financial planning is to protect your money during recessions as much as to aim for high returns when the market is booming.
Today, fintech companies are using artificial intelligence to create robo-advisers capable of creating personalized portfolios based on your life goals. These complex algorithms are capable of selecting stocks, allocating assets, and even making investment decisions on your behalf. While robo-advisers are gaining popularity due to their ease of use and low fees, in-house financial advisers still have a hunch and experience that robo-advisers cannot provide.
An in-house financial advisor can create a roadmap that covers the full spectrum of personal finance such as investing, savings, and taxes. Certified Financial Planners (CFPs) take 1,000 hours of classes where they are trained to understand your risk appetite, spending habits, long-term goals, and even your fears that could lead to emotional cash flows. When something is wrong in the market and you fail to figure it out, a financial advisor can objectively assess the situation to guide your investment decisions so that you don’t regret them later.
Misconceptions About Financial Advisors
While a financial advisor can make a huge difference in your long-term financial gains, there are still some misconceptions. SmartAsset, a billion-dollar fintech company that connects individuals with approved financial advisors, conducted an online survey investigation where 57% of 159 financial advisors mentioned that clients felt the advisers were “too expensive” or “too expensive”.
Typically, financial advisors charge one to two percent of assets under management (AUM). Assuming an advisor charges two percent of the assets under management and currently manages $ 100,000 in assets, the annual fee is $ 2,000. Since the average returns of S&P 500 stocks are 10 percent, however, these fees might be insignificant for long-term gains.
On the other hand, some investors refrain from partnering with financial advisers, fearing biased investment choices that benefit the advisor. One simple solution is to find advisors with a Certified Financial Fiduciary (CFF) certification from the National Association of Certified Financial Fiduciaries (NACFF). This certification implies that the financial advisor is legally and ethically bound to recommend investments in your best interest.
Financial advisers generally follow suitability and fiduciary standards. While the former requires advisors to find investments that are right for your portfolio, the latter ensures that an advisor is working to give you the best possible investment advice.
How to find financial advisers
Many people start by consulting friends and relatives to see how their advisors are handling their investments. A Bank of America survey in 2021 said 45% of 2,000 respondents turned to financial advisers to better manage their investments. The report mentions that many look to the reputation, fees, and even personal recommendations of advisors to refine their search. While it may seem simple, finding advisors you can work with for decades can be time consuming. If you prefer the online route, you can also be bombarded with confusing advice matching services.
New York-based fintech SmartAsset can help you speed up your financial advisor search by connecting you with up to three licensed fiduciary advisors near you in minutes. Over 65 million people use their wide array of award-winning tools and precision calculators to manage their personal finances, including retirement planning, investments, debt, taxes, and real estate. Their smart financial modeling simulation also offers insight into what your financial future might look like based on the decisions you make today.
In addition, SmartAsset’s financial advisory services are led by a dedicated concierge team that connects you with licensed advisors. All you need to do is take a quick online quiz about your financial goals and retirement expectations. Financial advisors will then be recommended to you based on your answers, and you can interview them and check their references to see if they are right for you.