Retirement Success: It Takes More Than Just Saving

“Save early and save often.” “Save at least 10% of your salary.” “Increase your savings with every raise.” We’ve heard advice like this our entire lives, but this advice will only get you part of the way to where you want to be.

We worked with a couple who diligently saved—even pushing their 401(k) retirement savings up to 15% of their salary. They were in their mid-40s, with around 20 years to continue saving and investing. Meanwhile, in their personal lives, they had new cars, a large house, children involved in extracurricular activities, and frequently traveled on extravagant vacations. However, after digging deeper into their overall financial situation, we found that these investors were on a treacherous path.

While they were saving, they lacked a comprehensive plan. They were saving for retirement without a clear idea of how to get there, like embarking on a cross-country road trip without any directions. Did they know if they were saving too much or not enough? Did they account for the possibility of a retirement that could last 20 to 30 years?

These questions can only be answered by developing a plan, and plans are developed around spending. We shined a hard light on what this couple was currently spending and what they anticipated spending in retirement. With future expenditures in mind, we factored in taxes, inflation, and a safety net for unexpected expenses. Remember, a 401(k) is generally pre-tax, so future withdrawals will be taxed as ordinary income. Should they continue their path without defining and prioritizing their financial goals, this couple could easily run out of money several years into retirement. One adjustment they could make was to save less for their children’s college education and more for their retirement. While saving for education is important, their children can supplement with part-time jobs, student loans, scholarships, grants, and financial aid. There are no loans for retirement. Imagine re-entering the workforce at 75 after being retired for eight years.

The next challenge was examining how they were investing. Like many investors, the majority of their savings were in their 401(k), where they had invested in an index fund and target-date funds. While these are solid investment choices, a target-date fund gradually shifts the asset allocation to bonds as the retirement date approaches. With 20 years until retirement, this particular fund was investing too conservatively for them. Meanwhile, although the index fund was on pace with the broad market, they were missing out on the potential for more aggressive diversification with small- and mid-cap funds and international funds. Small- and mid-cap stocks tend to perform better during economic recoveries and often have more room for earnings growth.

We continued to consider other factors that could influence their future, such as potential long-term care costs, their mortgage and interest rates on their debt, plans to work beyond retirement age, future tax rates on their retirement funds, and exogenous factors that can influence market conditions, like geopolitical events, natural disasters, or global economic changes.

While saving is undeniably crucial on the road to retirement, it is only part of the equation. A comprehensive plan that accounts for all aspects of your financial future—spending, investment strategy, tax implications, and potential risks—is essential to reaching your goals. Without a clear roadmap, even diligent savers can find themselves unprepared for the realities of retirement. It’s not just about how much you save but how wisely you plan for the journey ahead.

If you have questions on how to develop your retirement plan, the experts at Henssler Financial will be glad to help: