You wouldn’t dream of taking off without a flight plan to ensure you can arrive at your destination safely. Likewise, a financial plan is essential for your journey to a comfortable retirement.
Many pilots and other savvy investors realize they need a financial plan but they might avoid it because it takes time, knowledge and confidence to establish one and then follow through. They are not alone.
The 2015 Planning and Progress Study by Northwestern Mutual found that just 40 percent of adults in the U.S. have set financial goals and only 20 percent have a written financial plan. The study also found that just 26 percent had consulted with a financial advisor. That highlights a significant missed opportunity because those who do work with an advisor are nearly twice as likely to feel financially secure (68 percent vs. 35 percent) and are “substantially more likely to be savers, hold less debt and have a diversified portfolio of financial solutions.”
Creating a financial plan for retirement and then updating it as needed will help build your comfort and confidence as you head toward retirement.
When is the best time to start your financial planning? The sooner the better. We often work with pilots who are in their late 40s or early 50s, but it’s never too early to begin saving and planning. And there are significant benefits even if you are getting a late start.
STEPS TO SUCCESSFUL FINANCIAL PLANNING
Define Your Dreams
This first step is the most critical. Identifying your values, objectives and goals for retirement will, in effect, define your dreams for your life and lifestyle in retirement and help you make them a reality. It’s your opportunity to evaluate your financial situation and establish priorities. Will you retire at age 62 or 66? Do you want to spend time with family or is it all about having a boat or a fabulous vacation home? Do you need income of $150,000 per year or do you need more? There are no right or wrong answers – the choices are yours. With careful saving and planning, including attention to spending habits and debt, you can work toward the retirement lifestyle you desire.
Identify Your Sources of Income
Establishing what your current income is and what it’s likely to be in retirement are basic elements of building your financial plan. In addition to salary, your current income might include a military pension and income from investments. At retirement, your income likely will come from sources such as Social Security, retirement accounts such as 401k rollovers and IRAs, and possibly inheritance, in addition to any existing pensions. Some pilots also choose to work part time in retirement to stay engaged in their industry, which provides additional income.
Identify Your Expenses
Identifying your current and expected future expenses is critical to your plan. In the near term, it can help you find ways to increase your net worth by focusing on how much money you can invest or use to reduce debt. Start by listing monthly expenses, debt and any other liabilities. In listing your current expenses, be thorough. In addition to such obvious costs as food, housing, clothing, utilities, medical, vehicles, gas, education, taxes and insurance, include discretionary spending such as dining out, vacations and entertainment. Then estimate your expected expenses in retirement. Be sure to consider the financial consequences of unexpected events such as illness or death of a spouse, needing to move to a nursing home or assisted living, or in-home care.
Understand Your Options
Knowing and understanding your options concerning income and benefits are other keys to a successful financial plan. Your post-retirement healthcare benefits will have a significant impact on your monthly and annual costs, as will options within your pension plan and any military or other employer-sponsored plans available to you. When to claim Social Security benefits is a major decision and there are numerous claiming strategies—especially for married couples—that can be complicated. Although most individuals can begin claiming Social Security benefits at age 62, you can increase your eventual Social Security monthly income significantly, as much as 8 percent per year, by deferring the benefit until you are older. For more information, read our earlier blog post or go to socialsecurity.gov. Once you have identified and evaluated your available options in benefits and income, you can determine which choices and strategies will fit best into your overall plan.
Organize and Manage Your Money
Your choices in how you organize and invest your money are other key elements in your financial plan because they allow you to allocate and invest assets in a way that, in turn, will become income in retirement. You’ll need to determine your risk tolerance, which can vary depending on your current assets, current and future expenses, and when you wish to retire. You’ll need to understand how to build and maintain a diverse portfolio and to have the discipline to adjust when needed. As important as equities are to building long-term wealth, they should be balanced with other investments such as bonds, international investments, and even some alternative investments. The goal is to create a portfolio with a variety of investments that can perform well in different environments. You’ll also need to understand the tax implications of various assets and accounts as they increase in value and when they are distributed.
Some other tips:
- Maximize retirement savings – Make sure you contribute as much as you can afford or are allowed to under your airline’s retirement plan. Consider a Roth 401 (k) if it is offered. Although contributions are not tax deductible, earnings are not taxed and withdrawals provide tax-free money in retirement. In addition, individuals under age 50 can contribute up to $5,500 per year to a regular or Roth IRA; those 50 years and older can contribute up to $6,500.
- Protect your nest egg – Don’t tap your retirement savings early, unless you have no other options. Withdrawals before age 59 ½ will face a penalty in most cases.
- Avoid “hot” stocks or investment trends – It’s incredibly difficult to time stock purchases. By the time you hear about a hot investment, it’s probably already too expensive. You are better off investing for the long term and sticking to your overall financial plan.
- Pay attention to investment fees and expenses – Fees charged for investment transactions vary widely and can add up to a significant amount over time. Among the most common are plan administration fees, commissions and other investment fees, and mutual fund management fees and expenses. Ask your advisor what your investments will cost and select an advisor who will manage your overall expenses.
Create an Estate Plan
Thoughtful early attention to estate planning can help ensure your finances will be in order for your family and future generations, and assures your and your spouse’s affairs will be handled in the way you wish. Having an estate plan can also allow you to avoid probate court, place property and other assets in trusts, make provisions to care for and protect children and other beneficiaries, and protect assets from unforeseen creditors or lawsuits. Check out our Financial Planning blog post for additional information on how and when to build an estate plan.
Bottom line: a well-designed financial plan will give you comfort and confidence as you approach and then enter retirement. It can help you gauge how likely you are to achieve your goals and serve as a guide if and when you need to make adjustments. Our ClearWealth® Pre-Retirement Program is designed for pilots and uses sophisticated planning software to help predict the success of your financial plan, allowing you to adjust if your goals or circumstances change,
Setting goals and building wealth is not just about money. It’s also about choosing priorities that will help you achieve the life and lifestyle you desire for yourself and your family and to help ensure you reach your destination of a comfortable retirement.