Key Takeaways

• Retirement planning begins with your first contributions and grows more critical as your wealth and retirement draw closer.
• Formal retirement planning can help you define your goals, optimize strategies, and prepare your portfolio for retirement.
• The five years before and after retirement are crucial for managing risks and creating a sustainable income plan.

When should you start planning for retirement? Is 20 too soon? Is 55 too late? 

Knowingly or not, you started planning for retirement the minute you decided to participate in a company-sponsored retirement plan or make an IRA contribution.  

Everyone understands the importance of saving for retirement, but when you first begin, the stakes are low. At this early stage, your decisions are limited to how much you can afford to contribute to your retirement plan and how to invest the contributions to optimize the returns on your portfolio.  

As time goes on and your portfolio’s value grows and your time left until retirement shortens, the stakes begin to rise. Common retirement planning questions begin to form. 

• Am I appropriately invested?  
• What can retirement look like for me? 
• How much more will I need to save?   
• Am I on track to meet my retirement savings goals?
• What risks am I facing that I might not see?  
• Am I taking advantage of the opportunities available to me?   

This is where the need for a more formal approach to retirement planning arises and becomes more valuable.  Unfortunately, most think they don’t need or can’t seek formal retirement planning help until they are ready to retire.  This is just not true.  

How The Decision of When and How to Plan for Retirement Can Be Made Easier

Formal retirement planning with the help of a retirement planning specialist can provide value far before you are ready to retire and can help you answer the question of when to start planning for retirement and how.  

Formal retirement planning can help you develop your vision for retirement, quantify that vision, determine the gap between current and needed resources, identify and manage risks, and help you optimize the options available to you, including investment management, portfolio construction, and tax planning.

Three Factors to Help You Determine When to Start Planning for Retirement

The answer to the question “When should I start retirement planning?” will vary by each individual based on the following three factors:

1). Confidence in Current Advisor or DIYing

Most individuals start retirement planning by themselves (i.e., Doing-It-Yourself or DIYing).  Perhaps they seek some advice from a knowledgeable friend or family member, but most cannot afford (nor do they really need) professional advice right from the start.  As wealth grows and choices grow, decision-making can become more complex, and the cost of making a less-than-optimal decision becomes greater. Plus, DIYing your retirement finances can result in several negative unplanned consequences - read more here.

Each individual will have a differing comfort level given their risk profile and knowledge of personal finance.  People with less risk tolerance or knowledge often choose to hire a financial advisor to help them save for eventual retirement.   

No matter the route, there is typically a point where an individual realizes that retirement planning is a far different and more complex activity than simply saving for a day off in the future and managing an investment portfolio. There are many risks to consider that most people aren’t aware of or don’t know how to navigate without the help of a professional.

Similarly, people who sought professional advice early on may find they are not comfortable remaining with their current financial advisor when it comes to retirement planning.   It could be a lack of practice focus, lack of necessary knowledge/skill, relationship concern, or high costs that drive a person to a retirement specialist to serve them during this next chapter of their life.  

Whatever the route, individuals typically come to see the additional complexity and risk factors involved in preparing for retirement and realize that the help of a professional retirement planning specialist might be in order.

2). Cost Versus Benefit Economics

It can also make sense to seek professional retirement planning help when the benefits of doing so outweigh the costs.  The term “costs” in this context can take on two different meanings.  

First, in the case of someone DIYing, the term cost represents the opportunity cost of making a poor decision or suffering mental anguish over trying to make the right decision in a retirement planning strategy or in deciding when to start properly planning for retirement.  

When the potential cost of and mental toll over making a less than optimal decision becomes greater than the explicit cost of professional help, it makes sense to seek out that help.  You may be reaching a wealth/complexity level or stage in your life that it’s just not worth it to you to continue DIYing. 

Second, for those already working with an advisor, the “cost” can also refer to the explicit fees you’re paying. For example, if you’re paying an annual fee based on a percentage of your portfolio, these fees can become substantial as your wealth grows. 

A real-world example comes from a physician I recently spoke to. He was paying 1% of his $3 million portfolio to his financial advisor, which amounted to around $30,000 per year. After discussing his needs and the services we offer, he realized he could save $18,000 per year by switching to a flat-fee financial advisor like us.  The look on his face when I explained that he is paying his current advisor nearly $30,000 per year for just asset management, but he could work with us for a flat fee of $12,000 per year, was priceless.  Even if he didn’t elect to or need to take advantage of any of our other services but investment management, he would still be saving $18,000 more per year.  

Even if formal planning for retirement may be years out still, and you’re working with an advisor that charges you based on the size of your portfolio (%AUM), it may make economic sense to make a switch.  Click here to read more about the hazard of retiring while paying an advisor a percentage of your portfolio.

3). Proximity to the “Retirement Red Zone” 

The “retirement red zone” is a term coined by Prudential Insurance to refer to the five years leading up to your retirement date and the five years after retirement.  If you’re nearing this timeframe, it is definitely time to start planning for retirement.

This ten-year period deserves such special recognition because it is a time when you are exposed to a heightened sequence-of-returns risk that can seriously derail your retirement date plans or portfolio’s longevity after retiring.  See our Insight entitled “Critical Risk During the Retirement Red Zone” for more. 

This heightened sequence-of-returns risk is also a major reason why conventional wisdom holds that you start formally planning for retirement five to ten years from your intended retirement date.  It is important to begin transitioning your portfolio to one ready to support you in retirement.  This means reviewing the asset allocation decision and your portfolio’s construction so that you are in a good position to manage the heightened sequence of returns risk you will be exposed to during the “retirement red zone.”  

Another reason to start planning for retirement five to ten years before your intended retirement date is to allow time to develop and execute an optimized retirement income strategy that considers a withdrawal sequencing strategy to minimize lifetime taxes.  This strategy often calls for a series of Roth IRA conversions and other tax planning strategies.  See our Insight entitled “Developing a Retirement Income Strategy to Minimize Taxes” for more.

Start Planning for Retirement Today

Even if you’re not yet approaching the retirement red zone, it’s crucial to start planning now. This is the time when you need to solidify your strategies for tax minimization, income generation, and managing the risks associated with market fluctuations.

If you believe it’s time to take a more formal approach to your retirement planning, we’re here to help. Download our retirement planning guidebook, the Retirement Readiness Checklist, below in the footer to map out the most important steps to take as you get closer to retirement.

To learn more about how to optimize your retirement plan and take a more formal approach to retirement planning, schedule a friendly, informal call with our flat-free advisors and receive a complimentary Thrive Assessment to ensure you’re ready for retirement regardless of how old you are.