The “Set it & Forget It” financial plan is sometimes referred to as the “average financial plan” . It’s a pretty standard financial plan. And, while this type of a plan is better than not having a plan, a passive plan can also lead to unintended, disastrous results. When a pre-retiree incorporates this type of a plan into their retirement strategy, the first thought that comes to mind is typically a 401(k) with Target Date Funds (TDF). A TDF combines a variety of investment strategies into one mutual fund. Based on their target date of retirement, the concept is that investors can choose one mutual fund that will be managed for them throughout their entire life. This is because the asset allocation and investments inside the TDF will adjust over time. (1)
But in retirement,your strategy often needs to be more sophisticated. If you’re retiring in five or ten years, and all your money is in a TDF, your money may be subject to more risk than anticipated than it would with a diverse financial plan. When new people come to the office, we often discover that they were not currently positioned as they believed. Once we have a more profound conversation with our clients, the positions are sometimes entirely different than the initial plan. Not all TDFs are set up how you think they should be, and we see that confusion a lot with this impartial financial plan.
TDFs were created as a default mechanism for people who didn’t understand how to construct a portfolio that met their ability to get the growth they wanted at a risk level with which they felt comfortable.Since the markets have dropped so much over the past few years, the projected earnings on a TDF are different than the investor may have anticipated. And bond funds could be off 9-10%, as well. A retirement plan should be more complex than only saving money, especially when you’re 5-15 years out from retirement.
When I meet prospective clients for the first time, I usually ask what they would like to do after they retire, and what their goals are. A typical response centers around purchasing a second home in Florida, or getting an RV to travel. But they have never put pen to paper to figure out if that plan is affordable. Goals without a plan are nothing more than hopes. We take those goals, write them down, and figure out if we can achieve those goals through comprehensive financial planning. This allows us to attempt to create the reality of retirement before you retire. How do we do that? We accomplish that through the planning software that we have.
If your employer offers the option, you may need to challenge yourself to start saving more in their Roth 401(k). You may believe that doesn’t make sense if you’re at the highest income level, and you’ll pay that tax before it gets into the plan’s Roth 401(k) portion. This may be true. But it might be beneficial for you to pay those taxes sooner rather than later. You’ll determine whether or not that’s the right move after going through the Osiwala Financial Group’s comprehensive financial planning and multi-year planning process.
Another common blunder our advisors see is people making financial decisions based solely from a tax perspective because they received a large refund the prior year. While accepting that once-a-year check probably feels good, the bigger question is, why are you giving the government a 9-10 month loan? Is that in your best financial interest? Or would saving that money and investing it be a better option? How would that feel knowing that you were paying the lowest tax liability year after year? Our firm has CPAs who work with our financial advisors, so our clients understand the answers and how to proceed in the future.
Do you have a “set it and forget it” financial plan? How have you done during the accumulation phase? Have you considered how much and in what order you will withdraw your funds in retirement? From a tax perspective, your plan matters. What is the best age to begin taking Social Security to maximize your benefits? As you can tell, there’s a lot to consider in retirement, and unfortunately, it’s easy to make a mistake that could have expensive consequences. Want to learn more? Click HERE and start entering your information into our software. One of our OFG advisors will contact you to help you understand your current retirement plan and discover if another meeting is necessary to help you reach your retirement goals. Not ready to enter your financial information but have questions? Click HERE and request a 20-minute “ask anything” session with an OFG Advisor. There’s no cost, no obligation, and at the end of the day, you’ll have answers to help you navigate your road to retirement.