Retirement Rich, Cash Poor?

The Secure Act 2.0 created many incentives for retirement contributions. While I encourage my clients to save for retirement, there may be times when other goals in life take priority over maximizing retirement savings. In this article, I walk you through a basic planning template I use with my own clients to determine their investment allocation to different account types.?

Increases in contribution limit 2022-2023[1]

While these increases may be great opportunities for investors, you may want to consult with a financial professional before you decide if maxing out retirement contributions is the right decision. In planning with my clients, we consider 1) emergency fund and cash reserve needs 2) time to retirement and retirement goals, and 3) intermediate needs such as a home, new car, children, etc.

There is no one size that fits all answer for the investment % a person should have between liquid investments, cash reserves (savings, checking, CDs), and retirement (IRA, 401(k)). That is why I have created the following diagram to guide my clients. Please note, this is the brief version, and there are many other considerations when planning.

Financial Planning Outline ?

1.??????Emergency Fund/ Cash Reserve Needs

??? a.?What are my monthly or yearly NECESSARY LIVING expenses?

????? b. How much do I need to have in cash reserves?

??????????????????????????????i. This is your emergency fund. The average goal is typically between 3-6 months saved, but this varies by need, household age, etc.

ii. Once this is met, I can move on.

2.??????Create a Goal Timeline

?? a. 0-3 years: It may be best to keep these goals funded in cash reserves. Market returns can be more volatile in the short term, and there is no guarantee that your investments will be positive. If you need this amount of money soon, you may want to remove the risk.

????? b. 3-20 years (retirement is more than 20 years away): Evaluate goals that you have before age 59 ?. Retirement money may be penalized on top of taxable in the case of early withdrawal. This is where “mid-term/life planning” comes in.

???????????????????????????? ???i.?If, for example, you are 20 and have a goal of building your dream house with your spouse in 10 years, you may want to open a liquid investment account or brokerage account. At this point in your life, your investments may be tilted more to liquidity than retirement needs. Again, many more variables go into the decision.

?????????????????????????????????ii.?STOP: You don’t want to forget retirement, a good practice is to get a full employer match if you have the option. Remember, an employer match is technically, “free money.” As a financial advisor, I cannot add another 5% of your salary to your savings, but your employer may! Take advantage of this when at all possible.

????? c. ?3-20 years (retirement is 10 years away): as retirement approaches, it may be time to have a much more balanced approach when considering retirement funding.

????????????????????????????????? ?i.?If, for example, you are retiring in 10 years, and retirement is underfunded, your investment funding should focus on your retirement. You may also want to work with your financial adviser to dial in on how much you need in retirement, what income sources you have available, a realistic savings rate, and a manageable withdrawal rate.

??? d. 3-20 years (retirement Is less than 10 years away): as you get into the home stretch, consider strictly tracking your expenses and being intentional with your investments. At this point, you may want to make sure you are taking advantage of all retirement savings and tax incentive options (to the best of your ability).

3.??????Live comfortably and Trust the Financial Plan.

No financial plan is the same, and every person has different goals. You will consistently update and rearrange your financial plan, and that is why it is so important to work with someone you trust.

A financial plan is, as the title implies, a balancing act. Cash reserves, liquid investments, and retirement savings should be continuously rebalanced throughout one’s life. Stages of life, goals for your family, unexpected major expenses, or unforeseen illness are all examples of reasons to make sure you do not overfund your retirement and become cash poor.

For assistance in walking your balance beam to a secure financial future, please do not hesitate to contact me, or any advisor at Spearman Financial Services.

[1] https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500

We are looking forward to hearing from you!?To Schedule a meeting with Olivia, please call (740)397-0731 Ext. 4 or go to https://www.knoxcountyohiofinancialservices.com/contactus/.

Securities Offered Through Valmark Securities, Inc. Member FINRA, SIP

Investment Advisory Services Offered Through Valmark Advisers, Inc. a SEC Registered Investment Advisor

130 Springside Dr., Akron, Ohio 44333-2431?* 1-800-765-5201

Spearman Financial Services is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc. The material contained in the newsletter is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. All examples are hypothetical and for illustrative purposes. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Past performance does not guarantee future results.

?C