Financial Factors to Guide Your Retirement Plans

It’s been a rainy spring this year, but we’ve still had a few good days here and there, like this past weekend when our neighbors had a big picnic potluck. A lot of my good friends were there, including the son of one of my friends, I’ll call him Graham. Graham’s an all-around great kid, in his early 20s, who’s worked a variety of jobs for small employers since graduating college a couple of years back. Graham now finds himself working for the first time for a business that offers its employees a retirement plan and medical insurance. It’s a brave new world for him, but he found some of his new options to be a bit overwhelming.

“I don’t have the faintest idea of where to start,” he told me. “I’m getting a lot of conflicting advice about where to put my money or how to invest.” What’s more, regular news about the future of Social Security and the rising cost of health care has him concerned that he’s not doing enough.

Hmmm . . . 

You see, even in Graham’s 20s, he is looking for practical advice on planning his retirement. And you know, it’s really good that he’s thinking about this at his age. Preparing for retirement can be anxiety-inducing and overwhelming no matter where you are in the retirement planning process – just starting, like Graham, or much further along. Much of the advice out there can seem contradictory and confusing. And many of the questions you might have leading up to retirement aren’t readily determinable far in advance – things like life span, inflation rate, and investment returns can be estimated, but not known with any certainty.

With those factors unknown, I told Graham that it could be helpful to take a fresh look at how to prepare financially for retirement. To that end, I suggested that he start by narrowing the issue down to three key factors: How much he’ll save before he retires, how those investments are allocated and the cumulative results over time, and how he will spend that money in retirement. While weighing these factors won’t answer all the questions Graham may have about his retirement, doing so may provide some concrete information he – and you – can use to help guide future plans.

Let’s start with your retirement savings. Looking at this mathematically, this is simply a function of how many years you will continue to work, your income, and your saving rate. Some financial professionals ask clients to aim to save at least 15% of their pre-tax income each year for retirement. That figure may also include the matching contributions your employer makes on your behalf into your company-sponsored retirement plan. 

Of course, the devil is in the details. In this case, I’m talking about your savings rate. Your ability to save will vary dramatically throughout your life. It’s impacted by financial decisions you make every day. Graham is no different. He’s just started out, and he’s already saddled with some student debt and other expenses. But as I emphasized to him, it is important to pay yourself first . . . no matter what. In other words, before you pay your bills, set aside a portion of your income to save for your future.

I suggested that Graham make a budget to help identify where he can further save and invest – itemizing his debt and fixed expenses such as rent, car payment, food, and utilities. What’s more, Graham has enrolled in his employer’s 401(k) plan. The employer matches his contribution, too. That’s free money for Graham’s retirement, assuming he stays with the new company for a while and completes the plan’s vesting schedule. 

I encouraged Graham to be mindful of ways to pay himself first in the future, with techniques like investing future raises into his retirement savings rather than spending it. And to look for retirement investment opportunities outside of his employer’s benefits, such as opening a Roth IRA. Combined with an effective debt reduction strategy, Graham can be well-positioned for his future. And as a young investor and saver, Graham also has time – and the power of compounding interest – on his side.

While his savings rate may change throughout his life, Graham has more control over how his retirement assets are allocated. And that can make a significant difference in his overall financial condition in retirement. The right combination of investments for him might include equities, fixed-income investments like bonds, and cash-based assets.

As I explained to Graham, establishing the right allocation involves assessing the appropriate mix of risk and its cumulative return potential over time. In other words, what is the potential worth of the investment after 3,5,10 and even 20 years.  Of course, this will vary depending on the individual, their time frame for retirement, risk tolerance, amount of downside risk mitigation, and other factors. Graham’s just starting out in his career, so while he has the time to weather investment downturns, he still needs to be sensitive to the fact of the significant volatility the markets have experienced since the year 2000.

All investing involves risk, and market fluctuations and downturns are normal. So, while Graham may wish to emphasize some investments with the potential for higher return, it’s still vital for him to also employ strategies to reduce downside risk on at least a portion of his assets. Graham should look at having a safety net for when the markets experience turbulence.

With retirement still decades off for Graham, how much he will spend in retirement is uncertain at this point. There are still a number of unknowns that could affect his income needs and his sources of income in retirement, such as the solvency of Social Security and the cost of health care, which continues to rise consistently.

An appropriate strategy for many investors approaching and in retirement is to minimize fixed costs. That can include paying down one’s mortgage and minimizing real estate taxes and fees by downsizing or rightsizing to a smaller dwelling. With an emphasis on reducing debt, especially high-interest debt such as credit cards and loans, Graham can eventually approach retirement focused on enjoying what he’s worked so hard for.

Life is unpredictable, and Graham has many adventures ahead of him. By making retirement planning a priority at his age, he will be better prepared for whatever life throws at him, now and in the future.

Folks, are you prepared?

Like Graham, I encourage you to be vigilant and stay alert, because you deserve more.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at

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