When it comes to planning out your financial future, one adage rings eternal: It’s never too early.
While it can seem daunting to think of retirement for yourself or even a child far in advance, most financial experts recommend beginning planning at a first job and continuing regularly as the time approaches.
“With retirement planning, we think it's important to have a plan as early as possible,” says Leif Mahler, senior vice president of investments for Mahler Wealth Management. “We occasionally get referrals who are people approaching retirement in their early 60s with unrealistic expectations of a particular retirement lifestyle given how much they’ve saved.”
By considering retirement years and future financial needs early, a person is better able to plan their portfolio for those needs. The idea is to work with a financial adviser to set goals related to timeline and lifestyle, then form a strategy to reach those goals.
“First and foremost, our job is to understand the client’s goals,” Mahler says. “Often, people see their financial adviser as exclusively an investment manager. While we do manage investments, we need to understand what we’re trying to accomplish before investing a client’s assets.”
A common pitfall Mahler sees is planning based entirely on portfolio withdrawals and Social Security income that either incorrectly accounts for the future taxes and inflation or, worse, gives those factors no consideration. An adviser can help plan to prepare for those factors, compound wealth and safeguard against the unexpected.
Forming a strategy early makes it easier to strengthen a portfolio by diversifying investments over time. Ideally, a portfolio will include assets that are tax-deferred, such as a 401(k) or traditional individual retirement account; taxable, including bank accounts and personal investments; and tax-free, like a Roth IRA.
To do this, Mahler again stresses the importance of starting early.
“It’s hard to save at first,” Mahler says, “but the faster we can encourage young investors to contribute to their retirement plan at work, the better off they'll be in the long run. Compounding wealth is a key component of investing and even small contributions at first can make a big difference in a long-term retirement plan.”
Mahler says future planning is often a multi-generational task. Working with families, he often encourages getting children involved with an adviser as they transition from school into the work force.
Long-term care
Just as important as retirement in preparing for the future is the potential for long-term care needs. While a commonly noted figure states that 70 percent of people will eventually need long-term care, the American Association for Long-Term Care Insurance (AALTCI) cautions that the figure can be misleading.
“This number, based on a government study conducted years ago, may be accurate,” per the AALTCI website, “but the definition for ‘long-term care’ is quite encompassing and not relevant to a discussion regarding long-term care insurance utilization.”
The AALTCI points out that a 10-day stay in a skilled nursing facility, which would not qualify for long-term care insurance benefits, would be counted toward that 70 percent figure.
The AALTCI stresses that spending can't be averaged out. While it’s tempting to look for an expected expense, the fact that some people will never need long-term care eliminates the relevancy of a mean number.
Planning as a family can be just as important for long-term care. Again, it’s wise to consider realistic expectations for future health needs as well as goals and lifestyle expectations.
A better gauge of cost might be the type of care that a person would want to receive, though that also varies with health needs.
“This is what makes planning so difficult and usually forces tradeoffs in a family’s retirement plan,” Mahler says. “If you spend five years in a nursing home, it is a dramatically different situation than paying for a year of home care services.”
Mahler says that a private room in a nursing homes costs about $105,000 a year on average, while home aides or services will likely cost closer to $55,000 for a year.
Bringing the family into these discussions can be beneficial. It’s not uncommon, Mahler says, for parents to anticipate children acting as their primary care providers, while children might actually prefer to include a hired caretaker, even at the expense of a future inheritance.
Likewise, individual aims for a future estate will vary. A person who hopes to keep their estate well-preserved for descendants will take a different approach than, say, a couple with no children.
An adviser can help to clarify the best options for long-term care insurance based on those expectations, Mahler says.
Investing in traditional life insurance can help to preserve an estate by offloading some of the financial risk onto another entity. Alternatively, self-insuring, or using a personal portfolio to cover any potential costs, might make sense for those with less concern about a future estate– or for those who expect fewer future care needs and prefer to keep the money in hand. Hybrid life and annuity policies with long-term care riders can provide a middle ground, Mahler says.
Planning for long-term care generally starts much later than it does for retirement. Mahler recommends starting the discussion in one’s late 50s or early 60s. Checking in regularly with financial advisers, however, can help to keep retirement planning and investments on track in advance of those needs.
Cameron Carr is the senior editor. Feedback welcome at ccarr@cityscenemediagroup.com.
