Within the last 80 years, Americans created the modern version of what we call retirement. While the concept is still relatively new, there is some debate about what retirement should look like for most people. Some who are multi-decade workers would like to retire and never work again, while others claim to never stop working. While each person may have a different view of retirement, there are at least 5 reasons why retirement planning is important, regardless of whether you work or not.
The Problem
I have heard in the past from some clients that retirement planning is irrelevant if you never plan to retire. A lot of business owners have this mentality, where they would rather reinvest in their business than invest in their “retirement”. There is part of this argument that is true. If your current financial goals are shorter-term (let’s say in the next decade), and you are still a long way off from your 60s, it may not make sense to have an aggressive retirement plan.
But I would also argue, from a financial perspective, that having a retirement plan is important from a cash flow and wealth perspective. Especially in finance, there are degrees to how much each person should focus on retirement planning. But dedicating any financial resources to this goal can be productive for someone. Here are 5 reasons why you should consider it:
1. The Future Is Unknown
Perhaps the largest reason why retirement planning is important is that we cannot predict the future. The entire process of financial planning and savings is about living on less today so you can live on more tomorrow. Taken to the extreme, saving all of your resources today will give you a significantly higher likelihood of a better financial life in the future. That can be advantageous if you need to fight off the problems that life throws at you.
One of the basic financial recommendations is having 3-6 months in savings for an emergency. This is simply to help ‘weather the storm’ once it finally arrives. Retirement planning is weathering the storms of older age. The dynamics of your life or health, your family, and your environment could be radically different by retirement age. For some people, life problems like caring for elderly parents literally force them to quit working and retire. That leads us to the second reason.
2. Flexibility To Change
One of the best financial tools to fight against the unknown future is to have the flexibility to change. Retirement planning can allow someone the freedom to make more choices when future issues show up in life. One of my least favorite parts of being a financial adviser is seeing some die in their 50s or 60s. Among other reasons, simply knowing they worked the last 30 years only to enjoy retirement (if they even retire) for a few years can be defeating.
If you knew you would pass away in your 60s, would you do something different from what you are doing now? Maybe that looks like going part-time at some point, or selling the business but staying on as a consultant, or moving your skills to a less demanding industry. Planning for retirement and saving for those days can give you options when the tragedies of life emerge. Even for those who love their company and work, many people feel chained to their desks. They may make good money, but they are lacking options when life’s problems show up.
3. Retirement Helps Others
A lot of the flak for retirement also comes from the perceived selfish nature of it. Some choose not to retire because that means they move to a life full of hedonism and self-pleasure. I think that is the wrong way to look at it. There is nothing wrong with traditional retirement after a successful career. There are seasons of life that call for such changes. However, it is equally important to find and prepare for the “next season of life”. Retiring to your next adventure is just as important as what you are retiring from.
For business owners, especially, retirement planning and planning for your next adventure can be extremely helpful for employees, vendors, family members, and friends. Creating succession plans for the business that everyone understands can dramatically reduce stress about future employment. Providing family and friends with a vision of what you want to do next can help them and you build out what that looks like. Maybe that is volunteering, or starting a new non-profit, or becoming a full-time grandparent, or working part-time, or mentoring. Not planning for these seasons could not only hurt you but those around you as well.
4. Tax Benefits
The government is also directly encouraging you to save for retirement. Retirement accounts are one of the best tax breaks available to Americans. Coupling those with Social Security, Medicare, and other programs for those in retirement years, the government is very concerned about the well-being of Americans at this stage of life. At the very least, contributing to retirement accounts now can provide immediate tax relief, if that is a goal of yours. Maxing out retirement accounts like a Traditional 401k can give you tens of thousands of tax deductions this year.
For many people, a lot of their wealth outside their home benefits from these tax benefits. Whether it is a 401k, IRA, Stock Option, Pension, etc., it can be extremely beneficial to build up money for the future that does not need to be taxed now. With proper tax planning for your specific retirement goals, it is possible to significantly reduce your lifetime tax bill compared to cash-flowing your life each year. This leads us to the final reason.
5. Diversify Wealth
Retirement planning is an important savings vehicle, but it must be balanced with the rest of one’s financial picture. Working professionals who have almost everything in a 401k may feel strapped with day-to-day cash flow needs, and it could be argued that they save too much for retirement. The match component of retirement plans has been beneficial historically, which usually requires a base contribution level from the employee. Above that, it is important to balance how much retirement savings are needed for the true retirement goals.
Business owners and highly compensated employees generally have the opposite issue. Those who have most of their wealth tied up in one business can hold incredible amounts of concentration risk. Generally, anyone who has more than 10-15% of their total wealth in one “asset” (small business, stock, building, etc.), could have too much concentration risk. Retirement planning is simply a good way to help diversify wealth. Many refer to it as taking money off the table, so some wealth can be earmarked independently from their business.
Takeaways
Ultimately, retirement planning is one part of a larger financial plan. Some may choose not to put emphasis on saving for retirement, and that can work for them. However, there are benefits to retirement planning beyond simply retiring to golf 7 days a week. Having a plan for the unknown by being flexible and focusing on others can be extremely rewarding later in life. There is some financial wisdom (and many incentives) to save and diversify your wealth. Take some time to think through what retirement means for you and then build a plan for your finances to help you get there.
TC Falkner 