Financial Security: Is It Even Necessary?

In 2023, extensive research reveals a troubling trend: a significant number of individuals struggle to demonstrate financial security, particularly as they approach retirement. This underscores the reality that achieving financial security is a complex journey that demands meticulous planning and consistent execution.

While financial security can mean different things to different people, we will adopt a straightforward definition: having sufficient financial assets to cover your expenses, emergencies, and retirement without the anxiety of running out of funds.

Key Takeaways

• Starting to save early is advantageous, but it’s never too late to begin.
• Treat your retirement savings as a recurring expense, akin to paying rent or a mortgage.
• Reassess your financial profile if your lifestyle, income, or responsibilities change.
• If feasible, consider increasing contributions to tax-deferred accounts.
• Proper asset allocation should reflect your age, risk tolerance, and income needs.
• If married, evaluate your spouse’s savings and potential shared expenses in retirement.
• Engaging a qualified financial planner is crucial unless you are well-versed in financial management.

While it’s clear that starting to save early is beneficial, it’s important to remember that it’s never too late to begin—even if retirement is on the horizon. Every dollar saved contributes to covering future expenses.

For example, saving $200 monthly for 40 years at a 5% interest rate results in a significantly larger nest egg than saving the same amount for just 10 years. Even a shorter savings period can substantially aid in managing retirement expenses. As you near retirement, focusing on asset allocation becomes increasingly vital, as your risk tolerance typically diminishes with age.

Regular saving can be challenging amidst numerous expenses and tempting consumer goods. To combat this, treat your retirement savings as a non-negotiable expense, similar to rent or a car loan. Automating deductions from your paycheck can simplify this process.

If your contributions are deducted pre-tax, you’ll also reduce your taxable income, enhancing your overall savings potential. Alternatively, consider having your salary directly deposited into a checking or savings account, with a portion automatically transferred to your retirement savings.

Contributing to a tax-deferred retirement account can deter impulsive spending, as accessing these funds often incurs tax penalties. For instance, distributions from a traditional retirement account may be subject to income tax, and early withdrawals (before age 59½) could incur a 10% penalty.

If your income allows, explore increasing contributions to tax-deferred accounts. In addition to employer-sponsored plans, consider individual retirement accounts (IRAs), weighing the benefits of a Roth IRA versus a traditional IRA.

The adage “don’t put all your eggs in one basket” is particularly relevant for retirement savings. Concentrating your investments in a single asset type heightens risk and may limit returns. Effective asset allocation considers:

• Your Age: Younger investors can typically afford to take more risks, while those nearing retirement should adopt a more conservative approach.
• Your Risk Tolerance: Understanding your comfort with potential losses is crucial for maintaining a balanced portfolio.
• Growth vs. Income Needs: Determine whether your focus should be on asset growth or generating income.

A common oversight in retirement planning is neglecting to account for medical, dental, long-term care, and tax expenses. Create a comprehensive list of potential retirement expenses to make realistic savings projections.

While accumulating wealth is important, it can be undermined by reliance on high-interest loans for living expenses. Establishing and adhering to a budget is essential. Ensure that your retirement savings are included in your budgeted recurring expenses to accurately assess your disposable income.

As you approach retirement, your financial needs, expenses, and risk tolerance will evolve. Regularly reassessing your portfolio allows for necessary adjustments, ensuring your retirement strategy remains aligned with your goals.

Changes in lifestyle, income, or financial responsibilities warrant a reassessment of your financial profile. For instance, if you’ve paid off a mortgage or car loan, or if your dependents have changed, evaluate whether you can adjust your retirement savings contributions accordingly.

If you are married, assess your spouse’s savings habits and whether certain expenses can be shared in retirement. If your spouse has not been saving, it’s crucial to determine if your retirement savings can support both of you.

Unless you possess expertise in financial planning and portfolio management, enlisting the help of a qualified financial planner is advisable. Selecting the right planner is one of the most significant decisions you will make regarding your financial future.

How Much Money Do You Need To Be Financially Secure?
That depends on your age, income needs, and financial objectives. But generally speaking, the “4% rule” is a good measure of financial security. In other words, if you’re able to safely withdraw 4% from your investment accounts every year and never run out of money, it’s probably safe to say you are financially secure.

What Is the Difference Between Financial Security and Financial Stability?
Broadly speaking, financial stability means being free of debt and being able to comfortably pay off monthly expenses (with plenty left over for savings). Financial security, on the other hand, means having enough money to cover your expenses, emergencies, and retirement without the fear of running out.

How Can You Protect Your Financial Security?
The best ways to protect your financial security include:

• Continuing to live well below your means
• Remaining prudent when it comes to investing
• Establishing different streams of income
• Capitalizing on opportunities when they arise

How Can I Be Financially Free in Five Years?
In order to be financially free in five years, consider the following steps:

• Figure out your baseline level of revenue and expenses
• Cut your expenses as aggressively as possible
• Pay down as much debt as possible
• Boost your income with a second job or side business
• Ratchet up your monthly savings rate to 75% or greater
• Invest in a way that prioritizes growth assets

The factors discussed here are pivotal in shaping the success of your retirement plan and determining whether you can enjoy a financially secure retirement. A financial planner can help you identify additional considerations tailored to your unique situation.

As emphasized, starting early is advantageous, but it’s never too late to implement these strategies—even if you are already retired.