Retirement planning is a common part of almost every financial plan, but there is a difference between “financial planning” and “wealth planning.” This is similar to a Toyota being a type of vehicle, but not all vehicles are Toyotas.
Financial planning can focus on many goals, such as saving for your kid’s education or structuring your estate plan. Wealth planning is a broader umbrella of planning, where the strategy is to create and acquire assets that sustain themselves while financing your goals and contributing to your quality of life. Retirement planning is a perfect example to illustrate this difference.
To understand retirement in contrast to a wealth plan, we need to know the difference between your day job and your business. Whether you own and operate your own company or work for someone else, when you show up for work, that is your day job. Your business is the quality of assets held in your net worth statement. The higher the quality of those assets, the wealthier you are.
When you show up for that day job, it is a means to an end. It is a vehicle to fund your business until that business is running on its own. Consider that every dollar you save becomes an employee of your business. As your financial advisor, my job is to ensure those employees are working to their fullest capacity, so we can eventually replace your day job with your business. This is a critical piece of wealth planning and highlights the difference between a wealth plan and a financial plan.
Retirement accounts, like a 401 (k) or an IRA, are almost always part of that business. Tax deferral is a critical component of the net worth statement; however, there are drawbacks. These accounts can’t be accessed until age 59½ or later without incurring a 10% tax penalty, in addition to the income tax on withdrawals. At 62, you can start taking Social Security, and hopefully, you’ll die before you run out of money. This is a rather morose way of thinking about your plan.
I encourage my clients to shift their thinking from retirement planning to wealth planning. Yes, it is possible to oversave for retirement. If you find an imbalance between your retirement accounts and your other assets, you could run into a tax trap later in life. If you’re 75 years old and have spent all of your non-retirement savings, every dollar you spend comes from a taxable retirement withdrawal.
If we have properly balanced your assets, you should have a diversity of ways to finance your lifestyle. If you’re diligent, disciplined, and take some calculated risks, you won’t just retire. You’ll replace your day job with your wealth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Craig Wilcox is a Registered Representative with and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC.
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