Financial Planning Breeds Financial Success!

A stack of financial documents, forms, and a lined notebook on a wood panel table

With no shortage of financial myths and mysteries to choose from, there is possibly none bigger than the concept that financial planning is only for the wealthy. I hear this far too often. The truth for most folks, however, is just the opposite – financial planning is actually a path to becoming wealthy. Despite the stereotypes of millionaires plastered on the news or social media, middle-class Americans can even become millionaires.  Even with all this economic and political chaos, the American dream is still alive.  In fact, a recent study of millionaires shows that most millionaires didn’t grow up in wealthy families. In fact, 8 in 10 millionaires surveyed said they come from families at or below the middle-class income level₁.

My kid Sophie, is working as a waitress this summer at Shipwrecked in the Heights.  These days with Maeve at 21 years old, and Sophie and Phoebe at 19, with no summer sports anymore, them all working, and the fact that I will miss all of them in the fall as they enter college, I take every opportunity to hang out with my kids . . . even if I am just sitting there sipping my beer watching her hustle between tables.  

Anyway, I struck up a nice conversation with some folks from North Falmouth, I will call them Martin and Liz.  They are about 64 years old, and about a year from retiring to their summer home in West Falmouth. As we talked about their plans and their family, we sent Sophie for a few more beers.  Liz mentioned that their son and his wife, who are in their early 40’s, need a nudge to get serious about planning for retirement. She said, “I’ve asked them to talk to you about it, but they say that they don’t make enough money to create a real plan for retirement.”  

I found this statement disheartening because whether your goal is to become a millionaire or just retire comfortably, financial and retirement planning is crucial.  Heck, who has more to lose than someone with fewer assets? If a multi-millionaire makes a mistake or two when preparing for retirement, they typically have the resources to maintain their lifestyle uninterrupted. But if your funds are limited, planning is even more crucial to make sure you squeeze every penny out of your assets in retirement. One mistake could have a more profound effect on your ability to live comfortably in retirement.

With longer lifespans, and now with out of sight inflation, today’s retirees can expect to pay more for energy, food, healthcare, long-term care, housing, and other major life expenses.  And these burdens fall particularly hard on the middle class, which is not well-served by many of our retirement savings structures in the United States. Folks, America faces a massive retirement savings shortfall, as evidenced by the fact that 45% of working-age households have no retirement savings₂.

Get this, a recent report from the National Institute on Retirement Security₃, details the retirement savings challenges faced by the middle class, and how current retirement tax incentives often fail to overcome these challenges. The current tax incentives for retirement savings are oriented around the defined contribution savings system, such as 401(k) plans and Individual Retirement Accounts (IRAs). The report revealed that these tax breaks tend to offer little real incentive to save for middle-class families. Why is that?

Well, consider that one of the primary tax benefits of saving in a 401(k) or IRA comes from the immediate tax savings resulting from pre-tax contributions. However, most middle-class families will only receive a tax match of zero, 10, or 12 percent due to their often-lower earnings levels and recent changes to the tax code. That is not a very strong incentive to save, especially with more pressing, near-term financial needs.

Higher income households, however, have a much stronger incentive to save because they face higher marginal tax rates. In fact, according to the report, those households in the top ten percent of the income distribution account for more than half of the present value of tax breaks for 401(k)s and IRAs₄.

And while Social Security does much to reduce elder poverty, its income replacement rates drop off quickly, meaning a middle-class family usually cannot maintain its standard of living in retirement on Social Security alone. 

In addition to the immediate tax savings from a 401k or IRA, a significant benefit of using them is the internal buildup of investment earnings, which accumulate tax deferred.  If you start saving early, contribute regularly, and contribute significant amounts, you could build a substantial nest egg by utilizing the tax deferral feature. Unfortunately, workers who are not able to access and/or contribute to these plans regularly mostly miss out on this powerful tool for building a retirement nest egg.

So, what can you do if you find yourself in a similar situation, struggling to prepare for retirement? You shouldn’t be surprised to hear me say, “Have a plan”. As I tell my kids, if you want success in anything, the first step is to take action and have a plan.  It’s OK to start small, and this might mean taking steps like getting out of debt, following a budget, investing regularly – any amount you can is a good start. Stay focused on the long game because small steady steps can add up to big ones. Folks, don’t fall for the myth that retirement planning is only for the wealthy; you might even find yourself on the way to becoming the “millionaire next door.”

And as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, PFS/CPA, offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield.

Jeff can be reached at Insurance products, including annuities, are offered through Cutterinsure, Inc., (MA insurance license #2080572). Cutter Financial Group and Cutterinsure are affiliated and under common control but offer services separately. Members of Cutter Financial Group’s management receive revenue directly from Cutterinsure. Any compensation received is separate from and does not offset regular advisory fees. Cutter Financial Group does not charge advisory fees on any insurance products. We do not offer tax or legal advice. Always consult with qualified tax/legal professionals regarding your own situation. Investing in securities involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Market data and other cited or linked-to content in this article is based on generally available information and is believed to be reliable. Please contact us to request a free copy of Cutter Financials’ Form CRS, Form ADV 2A and applicable Form ADV 2Bs. 1 
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