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Why Retirement Planning is Different from Financial PlanningSubmitted by Align Wealth Partners on March 28th, 2019
On the surface, the terms “retirement planning” and “financial planning” might seem interchangeable. But while they are similar in many ways and often do go hand-in-hand, the two are not exactly the same. Each has its own intricacies and fine details that make it unique.
Let’s dig a little deeper into why retirement planning is different from financial planning and look at how we believe you should go about planning your own retirement.
The Financial Planning Umbrella
First off, before we can break down the difference between financial planning and retirement planning, we need to define financial planning as a whole.
The broad definition of financial planning is about drawing a blueprint that gets you from where you are today to where you want to go tomorrow, next year or 30 years from now. Whether it be short-term, such as saving for a down payment or a family vacation, or long-term, such as putting money aside for your young children’s college education, paying off your mortgage or getting out of debt altogether, financial planning is about setting a goal, and then executing a financial plan to pursue that goal.
And, invariably, there often isn’t just one, but a combination of several goals that you have to juggle all at once, which makes having a solid financial plan that much more critical to pursuing your goals.
Ready to discuss your future plans with a trusted professional? Contact Align Wealth Partners to see how we can help.
The Focus on Retirement Planning
In a way, retirement planning is financial planning. It is the final stop on your financial planning timeline. The two often run parallel to each other. While you are setting aside money for mortgage payments, you are also setting aside money for retirement at the same time.
However, this is where their similarities end and their differences begin. Let’s take retirement planning out of the financial planning umbrella and break down the following 3 key distinctions.
With or Without Income
When you put together a financial plan, there’s an explicit assumption that you are currently earning an income, and will continue to earn an income throughout the duration of your financial plan. In fact, your financial plan is often based on your current and expected income. It is the driving force behind everything.
But when you retire, you will most likely not earn the same income as you do now. After all, it’s the definition of retirement. You retire from your job so that you can live the rest of your life enjoying the fruits of many decades of hard work. You can certainly still work doing something you enjoy, but your source of income typically changes dramatically because the majority of your current income will no longer be available to you.
Here is where retirement planning specialists can add value to your retirement. They can construct a plan that allows you to draw down on retirement income such as Social Security, pension, Medicare and investments. A retirement specialist can help answer key questions, such as whether you should start collecting Social Security checks at age 62 or wait until age 70; how much of your savings and investments you could take out each year and still have enough left over for future years; and what types of investments are best suited for you during retirement.
While a general financial planner may be great at allocating your current income, he or she may or may not have enough in-depth knowledge to answer questions that are specifically related to the time after you no longer have that income.
Certain Point in Time Vs. Uncertain Period of Time
Financial plans are fairly straightforward and come with a degree of certainty. You know that if you pay your mortgage in full and on time each month, at some point in the future, your mortgage balance will be zero. The same goes with your car payments and credit card debt.
Retirement doesn’t offer as much certainty. Of course, you can estimate the amount of money you need to set aside each month in order to reach a certain wealth by the time you retire (for example, you can set a goal to have $1.2 million in the bank by your 65th birthday), but several outside factors can change that plan in a hurry. The stock market could go down. The government could decrease Social Security benefits. Healthcare costs could increase. These factors are often times out of your control, and a good retirement planner should be able to take them into account when they help you structure your plan.
Financial planning focuses on building a plan for you and your family today, whereas retirement planning is more about planning your future.
Reducing Debt Vs. Building Assets
The third key difference between financial planning and retirement planning lies on the balance sheet. Just like any other balance sheet, your personal balance sheet has assets on one side and liabilities on the other side.
Financial planning is mostly about setting money aside in order to reduce your debt and decrease your interest expense. It focuses on the liability side of your balance sheet.
Retirement planning on the other hand is mainly about setting money aside in order to build up your assets and increase your interest income. Seeking to grow your investment portfolio is also a big part of building your assets.
Whereas a financial planner may be good at helping you reduce debt, a retirement planner's objective will be helping you grow your assets.
Financial planning and retirement planning share similar characteristics in terms of structuring a plan for your future, but that’s where their similarities end.
A general financial plan looks at all of your financial goals, and a retirement plan focuses strictly on preparing you for retirement. As such, retirement planning can go into more granular detail about this key aspect of your life journey.
Whatever stage you’re at right now on your financial planning journey, the most important thing you can do for your financial future is to have a plan and stick with it. Speak to a financial advisor who specializes in retirement planning Baton Rouge and see if you’re on the right track to enjoying your retirement.