Retirement Planning

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Saving is a good first step, but planning and investing are the keys to building wealth and achieving financial security for retirement.

Most of us know we should save money. But when it comes to actually doing it, people tend to fall into two camps: non-planners and planners.

Non-planners typically save when they can, perhaps putting a small amount into a workplace retirement plan, hoping that everything will work out in the long run.

Planners generally know what they’re saving for, how much they need to put away, and how long it will take them to reach their goals.

A financial plan will help you see what it will take to retire the way you want.

Only 28% of Americans have a written financial plan, according to Schwab’s 2019 Modern Wealth Survey.1 Of the rest, almost half said they didn’t have enough money to make a plan worthwhile. Others said it was too complicated, or they didn’t have time to develop a plan.

Five reasons why:

1. A written financial plan increases confidence.

Sixty-three percent of people with a written financial plan say they feel financially stable, while only 28% of those without a plan feel the same level of comfort, according to the 2019 Modern Wealth Survey. Fifty-six percent of planners felt “very confident” they would reach their financial goals, compared with only 17% of non-planners.

2. A financial plan leads to better habits.

Financial planning isn’t just about investing, and in fact it can be misleading to calculate the benefits of each financial decision in dollars and cents. Many sound financial decisions are more easily explained in quality-of-life terms—such as the security that life insurance offers, or the peace of mind that having an emergency fund can provide. There are healthy money habits and there are good investing habits; a written financial plan can lead to both.  (Source: 2019 Schwab Modern Wealth Survey)

3. A financial plan can help even if you don’t have much money saved.

The most common reason cited for not having a plan is “I don’t have enough money.” This is a misconception. Planning even in small steps doesn’t take large sums of money to start.

In fact, financial planning can have a profound impact on lower-income households, by helping people improve their saving and budgeting habits. A written plan helps savers prioritize their goals and provides a way to measure success.

Source: 2019 Schwab Modern Wealth Survey

4. A financial plan can be tailored to help every personality type.

Schwab’s Modern Wealth Quiz can tell you what type of person you are with regard to financial planning, and can provide tips on taking the next steps toward your financial goals based on your personality type. During the recent Modern Wealth Survey, most of those who took the quiz could be characterized as having a “Dreamer” planning personality type. To a Dreamer, life should be lived—not planned. Yet Dreamers may find that a bit of planning can significantly help them achieve the freedom to live the way they want.

What’s your financial personality type? Here are the six types, with the percentage of people surveyed who matched them:

  • Dreamer (43%): Dreamers are the free spirits of our world, who shake their head in confusion at all those who schedule their lives to the last detail.
  • Improviser (18%): Improvisers are typically quite self-sufficient, with a deep desire for independence and doing things their own way.
  • Organizer (11%): Admit it—you love lists. Categorizing and organizing everything from your sock drawer to your personal finances gives you a warm, fuzzy feeling.
  • Architect (10%): A master of both creativity and logic, the Architect is the rare individual who not only imagines the future, but designs solutions to make it happen.
  • Maverick (10%): Unafraid and unapologetic, Mavericks are those rare individuals who would rather reshape their world than try to fit in it.
  • Philosopher (8%): Taken from the Greek word meaning “lover of wisdom,” Philosophers enjoy thinking about and solving problems.

5. A plan helps you create an investment portfolio.

A choice of investments, portfolio or financial products ideally are the result of a plan—they’re not the plan itself. That’s why the first of Schwab’s 7 Investing Principles is “Establish a financial plan based on your goals.” Investment products—like stocks and bonds—are the tools that are used to potentially realize the goal. They’re part of a larger puzzle. A financial plan can also include retirement, insurance, tax, and estate planning, as well as strategies—such as retiring early, or saving more—that are actions, not products. Effective planners use all these tools, with the financial plan as the playbook.

Working with a professional financial planner can help. Research has shown that households that work with a professional financial planner were more likely to make better financial decisions than those without a planner, taking into account portfolio risk levels, savings habits, life insurance coverage, revolving credit card balances and emergency savings.2

Bottom line

A financial plan is the foundation on which to build, understand and achieve your goals. Having a written plan which takes a holistic look at your needs, can increase confidence and result in more constructive financial behavior and more favorable financial results.

Financial planning relegated down into five easy steps:

  1. Identify your goals. Think broadly about your goals and determine how you’ll be able to financially achieve them.
  2. Collect all of your financial data. It’s very important to determine how much is coming in, and how much is going out.
  3. Develop an immediate and long-term plan. Make a budget and stick to it.
  4. Put your plan into effect. It’s very important not to stray from it. You need to set realistic goals for yourself so that you’ll be able to stick to them.
  5. Monitor and update your financial goals to adjust to your life.

Saving for retirement is one of the most important financial goals.

References:

  1. Source: Schwab Modern Wealth Survey. The online survey was conducted by Logica Research from February 8 to February 14, 2019, among a national sample of Americans ages 21 to 75 and an augment sample of 200 older Generation Z-ers ages 18-22 for generational comparisons. The national sample was balanced to be demographically representative. The margin of error for the national sample is three percentage points. Quotas were set to balance the national sample on key demographic variables.
  2. https://www.schwab.com/resource-center/insights/content/does-financial-planning-help
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