In Wealth Management

Have you scribbled down a New Year’s resolution somewhere or logged into an online tool to take retirement planning more seriously? Is 2022 the year that you start making real strides toward creating retirement wealth? 

Many people feel that they should do more to ensure the security of their financial future, with only 36% of pre-retirees thinking that their retirement savings are on track. 

Don’t worry, there are simple, practical things you can start doing today that will make a big difference over the coming years. It’s always a good time to articulate important goals and begin working toward a more certain retirement.

In this article, I’ll give you easy, actionable steps to take now and I’ll outline some strategies for creating retirement wealth.

Think how great it will feel to cross “prepare for retirement” off your list of resolutions!


Step 1 | Understand Your Options for Building Retirement Wealth

The first step toward building long-term wealth, aside from making the decision to save for retirement, is to understand your options for retirement investing.

I recommend that people set aside some money in a regular savings account (for emergencies or discretionary spending). However, this account should be conservatively invested and likely will not help build the wealth you need to retire. For that you should look to taxable investment or dedicated retirement accounts, where you can efficiently make investments that have higher expected long-term returns, but also have higher risks. 

Taxable investment accounts have the advantage that the money can be quickly accessed, with no restrictions on the use of the account.  Retirement accounts, such as 401(k)s & IRAs, have several advantages, which can help you grow your wealth faster than a taxable retirement account.  These advantages are:

  • Upfront Tax Deductions:  Income deferrals made to a traditional 401(k)s or Individual Retirement Accounts reduce your reported income on your 1040 tax form in the year you make the contribution. 
  • Matching Contributions:  If your employer offers a retirement plan  – SIMPLE IRA, 401(k) – with employer matching, this is an incredibly easy and powerful way to save even more.  In many cases, this is just like giving yourself a pay raise!  
  • Tax-Free Compounding:  Compounded interest is one of the major building tools to create wealth.  This is one of the secrets of long-term wealth building because it allows you to earn on both your initial investment as well as any earned returns and interest. If you want to see a simple example of how compound interest would affect your saving’s plan over a specific period of time, try using this free calculator are made with pre-tax dollars.  Retirement accounts allow this on a tax-free basis, which give them a considerable advantage over a taxable investment account.  
  • Potential for Permanent Tax Savings:  Tax deferred accounts do not eliminate taxes, but they enable individual to delay when they pay taxes on their hard-earned income.  The trick is to postpone this taxable event to when you retire, a time when most people have a much lower tax rate.  This represents a permanent tax reduction. 
  • Special Situations:  Roth 401(k)s and Roth IRAs have slightly different rules.  With these accounts, you put your money into the account after you have paid taxes on this income.  Roth accounts enjoy the same tax-free compounding but, in contrast to a traditional 401(k)s or IRAs, you do NOT pay taxes on your withdrawals. The logic here is that you have already paid taxes on this income the year it was contributed to the account!

The Federal government is willing to give these tax breaks as incentives for people to save for retirement.  However, there are some restrictions and penalties on these accounts as well.  For instance, if an individual withdraws their money before they are 59 ½ years old, the Federal government will charge a 10% fee on the withdrawal amount along with normal income taxes.  Ouch!  So be mindful of these rules as you think about your personal strategies.


Step 2 | Increase and Adjust Your Savings

Once you’ve committed to making retirement a priority, you’ll need to take a few specific steps to take advantage of available savings opportunities. 

I recommend considering at least the 4 areas below to ensure that you’re making the most of a savings plan:

  • Increase the percentage of your salary that is deferred into the 401(k). How much? If you can, you should aim to contribute enough to maximize any employer match, if that is offered. This is one of the best personal financial decisions you can make!
  • If a 401(k) is not available through your employer or due to your work situation, then an individual retirement account (IRA) is another great option. Like 401(k) accounts, IRA can be set up as either a traditional or Roth account.
  • Don’t forget about funding a taxable investment account.  These accounts can be more flexible and don’t have as many rules and regulations.  
  • While not a classic retirement account, another option to consider, if available as a feature on your health plan, is funding a health savings account (HSA). HSAs are funded with pre-tax dollars, earnings grow tax free, and money can be withdrawn tax-free now or in retirement to pay for qualified medical expenses. After age 65, money can even be used for non-qualified expenses, although you will have to pay any income tax due on it if used for that purpose.
  • Take a close look at your monthly budget and see if there are ways to adjust your spending and increase your retirement contributions. Every little bit counts, and consistently contributing several hundred dollars a month can become tens of thousands of dollars later on.

Investment Strategy Consideration: Match Your Portfolio with Your Risk Profile

As you begin to save money in a retirement account, the ultimate value of your hard-earned savings will be influenced by the investment returns (i.e. the performance of your funds). Saving every month is a great first step, but so is figuring out the appropriate level of investment risk – which can be impacted by your age, goals, contribution amounts, and more

The more investment risk (higher volatility) you accept, the higher your investment returns can be – although nothing is guaranteed. Unfortunately, downturns in performance can also happen, and your risk appetite can be tricky to determine. I often see mismatches, which can lead to behaviors where individuals change their portfolio strategies at the wrong time and negatively affect long-term investment returns. 

When advising my clients, I encourage them to start with my free risk assessment tool that measures how comfortable they are with different approaches to investing, whether it be selecting a target date fund or a variety of other available funds. After they take the assessment, I help them understand the strategies and mindset needed to be successful.


Step 3 | Work With a Partner to Bring Your Goals Within Reach

Although we’ve covered the first steps toward wealth creation in this article, there is certainly much more to learn. For example, it might still be confusing exactly how to determine your risk appetite, or how much money you’ll have when you retire. 

Knowing what tools are best for you will make this whole process much, much easier.  For instance, not understanding how an employer-sponsored retirement account works can lead to inaction. Employers are sometimes hesitant to initiate benefits that employees don’t fully appreciate; employees are hesitant to use wealth building tools they don’t fully understand.  If this sounds like you, don’t hesitate to reach out to us to see if Sapling Wealth Management can help.

A financial advisor who specializes in helping individuals plan, learn, and reach their goals can be invaluable for long-term success. My job is to help make the process of planning for retirement clear and straightforward by providing insights and helping clients proactively manage for their futures.

If you have questions or are unsure about next steps, pick up the phone and give me a call or schedule a meeting online. We’ll walk through your concerns and goals together.

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