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Retirement Readiness: Financial Planning and Mental Wellness

Retirement Readiness: Financial Planning and Mental Wellness

May 20, 2021

Do you feel like you are not succeeding at preparing to be ready to retire? Do you have spending habits that leave you feeling anxious? You are not alone. 

How we save and how we spend don't just tell us how ready we are for retirement; how we save (or don't save) and how we spend our money can be used as an insight into our mental wellness, too.

Unfortunately, for some people, it is the rush from an impulse buy that gives us a rush of dopamine and makes us feel good until we find ourselves surrounded by clutter and become anxious when our bills come due. As a result, many people are afraid to look at their account balances or credit card bills. 

On the opposite end of the spectrum, some don't spend hardly anything, and they aren't enjoying their lives because they are so worried about not having any money or not being able to retire that they don't live at all. So while it is essential to save for your future and have a safety net, spending your money on things and experiences that make you happy now can better your mental health.

Most of us want to work so we can live, not live to only work. However, it is no secret that money is a common worry that takes a toll on many facets of life, including the mental and physical health of many and their relationships with others.

May is Mental Health Awareness Month, so I want to take some time to focus on how focusing on retirement readiness can aid you in your financial and mental wellness.

Money may not be able to buy you happiness, but money well spent and well saved can buy you some peace of mind. 

Is money on your mind? You are not alone on this either, and it is good to have a plan for your money that makes you comfortable! Working with a financial planner and having a financial plan is comforting and reassuring for your future and can aid you in staying on top of both your financial and mental wellness.

Every individual has their own unique financial needs and can be at different places in their retirement readiness because of age, careers, lifestyles, and other circumstances. Additionally, risk tolerance is also a crucial factor because you don't want to take on investments that will make you more nervous than hopeful about your future and savings.

Next, I want to delve into what you can do in your 30s, 40s, and 50s to prepare yourself for your retirement years.

Saving in Your Twenties and Thirties

We realize in our twenties that life can be expensive, and a lot of people find themselves burdened with significant student debt and high credit card balances and even work multiple jobs to get ahead. Unfortunately, the older we get, the costs seem to keep piling up; mortgages, car loans, child care, groceries, utilities, health care and unexpected expenses make it essential that you prepare yourself for as many of life's future curveballs as you can.

  • Increase your 401(k) savings as you earn raises by putting a portion, or all of your raises, into your 401(k) instead of spending it. If you can't afford to put all of your raise in your retirement account, gradually increase the amount you are putting in, so it is easier to adjust your expenses and start building up savings; every bit counts!
  • In your thirties, you have more time to save, which means you can hold and maintain some more aggressive investments than you will be able to in the future because you have more time to recover from losses. However, you will want to make sure you're investing within your risk tolerance because you don't want to make yourself consumed with worry. There is more to risk tolerance than just income; you want to be comfortable with your holdings, so you have peace of mind.
  • If your employer matches your contributions, take advantage of that by putting in at least as much as they will match if you are able. (i.e., if your employer will match your 401(k) contributions up to 3%, put in at least 3% of your paycheck to take full advantage of the benefit.)
  • If you are under 50 years old, the maximum contribution to an employee-sponsored 401(k) is $19,500 in 2021. So if you have maxed out your contributions, give yourself a big high five, and consider increasing your retirement contributions by opening an IRA or Roth IRA account with your financial planner, if eligible.
  • Owning stock in the company you work for is a great perk but make sure you keep an eye on the performance of the company's stock and that you do not become over-allocated in it in case the company stock plummets.  
  • When you leave a company, resist the urge to cash out your retirement account. Cashing out your retirement account will set your savings back, and because you are under 59 ½ years old, you will also receive penalty fees for taking your money out early. However, if you do not wish to leave your funds where they are, you can roll over your investments to a different retirement account without penalty.
  • If you save for your children's education, look at starting a tax-advantaged 529 college savings plan which is a better way to save for their education than putting money aside in a regular savings account. These accounts can also be used for tuition for elementary and secondary schools.   

Saving in Your Forties

If you are in your forties and haven't started saving for your retirement or feel like you are behind in your savings, the first step is to identify how much money you believe you will need in retirement.

$1 million sounds like a lot of money, but if you are taking out 3-4% each year in retirement, you will be living on $30,000 to $40,000 a year. Accounting for inflation, that could still be a pretty modest living, depending on your lifestyle. But, of course, these numbers are not taking Social Security income into account.

If you want to live on $30,000 to  $40,000 a year, your portfolio will need to be at least $1 million, assuming you don't have other sources of retirement income such as rental properties, a pension, or other part-time or passive income.

In your forties, you still have time to catch up and save plenty for retirement. Here are some tips for maximizing your investments: 

  • In your forties, you still have time to take on some more aggressive investments. First, however, you will want to analyze if the amount of risk is worth the reward of the difference of a small percentage return on investment.
  • If you have maxed out your 401(k) contributions, opening a Roth IRA would help you by adding contributions that will grow tax-free. This is because the funds are taxed when they’re added into the account rather than when you withdraw them. Additionally, you can avoid capital gains tax on the growth, and qualified withdrawals may be withdrawn tax-free.
  • If you haven't already, it's time to make sure that you are adequately covered with insurance policies. Having the right coverage for you can protect you and your dependents from unforeseen expenses and events.
  • Focus on paying down your high-interest debts such as credit cards, car payments, and mortgages. If your mortgage is newer, you could benefit by paying towards the principal on the loan. If your mortgage is almost paid off, it may be more beneficial to put the money in your retirement account.
  • If you cannot assist with college tuition for your children, don't empty your retirement accounts. While they will acquire student loan debt, they have their whole lives ahead of them to save for their retirement and pay down their student loans. It may help if you also consider you will be helping your children by having sufficient retirement funds and long-term care insurance for you and your spouse. In addition, if your accounts do well and are well managed, you may be able to leave an inheritance to help them in their futures.  

Saving in Your Fifties

If you are behind in retirement savings in your fifties, it's time to put the pedal to the metal and start maximizing your savings. Here are a few of the best ways for you to grow your retirement in your fifties:

  • If you haven't already, now is the time to refine your budget to maximize your savings and start paying down your high-interest debts.
  • When you are 50 years or older, you are allowed a $6,500 (2021) "catch-up" contribution to your 401(k). This catch-up contribution will allow you to save $26,000 a year rather than $19,500. Contributions are generally due within the calendar year. 401(k) contributions are put into your account pre-tax, which means that your taxable income is lowered.
  • Additionally, since your contributions to your pre-tax 401(k) contributions are automatically taken out, it will feel like less of a hit on your income once you are used to the difference in your paycheck.
  • Put your retirement savings on automatic withdrawal, so you are not tempted to spend it.

Key Take-Aways at Any Age

Refine your budget and prioritize adding more to your retirement savings.

  • Identify how much money you think you will need in retirement.
  • If you can max out your 401(k) contributions, open up additional retirement accounts such as a Roth IRA or Traditional IRA and take advantage of the catch-up contributions if you are 50 years or older.
  • Identify your risk tolerance and invest as aggressively as is appropriate, but not more than which you are comfortable.
  • Don't cash out your retirement funds when you change jobs.
  • Focus on paying down your high-interest debts.
  • Automatic withdrawals going to your retirement accounts reduce the temptation to spend.
  • Make sure you are adequately insured to protect your livelihood and any dependents.
  • It's never too late to start saving! 

Your financial needs are as unique as your fingerprints, and no matter where you currently are in your financial wellness journey, yesterday is always the best time to begin being strategic in your spending and saving. If you’d like a partner, I am here to help you develop a financial plan to increase your financial wellness and your peace of mind.