Editor’s Note: This article is Part 2 of a month-long series on financial illiteracy in America. April marks National Financial Literacy Month, and to help raise Americans’ financial awareness, SafeMoney.com is teaming up with the Society for Financial Awareness (SOFA), a leading financial literacy non-profit, to spread the word. You can read here our dynamic interview with Jim Chilton, the CEO and founder of SOFA.
When venturing into the great unknown, you wouldn’t travel without a GPS or a map.
They are a “must-have” for reaching your destination. And for arriving on time, for that matter! How otherwise could you tell if you were going the right direction or if you were lost?
The same principle applies to our retirement. Whether you retire 10 years or 10 months from now, you need a financial plan.
In many ways, a plan is like a financial roadmap. It lays out clear directions for you to take and helps you keep on track.
Yet most people don’t have a roadmap for their future retirement. Just three percent of Americans have a written financial plan, according to Jim Chilton, founder and CEO of the Society for Financial Awareness.
Overcoming the “Ready-Fire-Aim” Mentality
And what explains the planning gap?
The fact that, all too often, we take a “spend-first, plan-later” approach to our finances, Chilton explains.
“Most Americans, sadly, are spenders first, then planners second – if at all. The basic common sense of plotting, planning, and participating in managing our cash hasn’t been wired into us,” he says.
“And why? I believe spending quenches our thirst. It’s more fun to burn through our money than it is to account for it.”
Just as with planned travel, retirement success has only two outcomes: you either get there or you don’t. There are no in-betweens.
Either we will have the money for a comfortable retirement, or the reasons why we don’t.
Why Do You Need a Financial Plan for Retirement?
So, why all this fuss about having a financial plan? Why is it so important for everyone to create and maintain one?
Because a plan brings vision, clarity, and accountability to how people handle their money. It’s a North Star that helps guide financial behaviors and choices – and that helps us accept responsibility for whatever we do.
Far too often, with no financial plan in place, people behave in ways that ultimately lead to financial setbacks or, worse, financial catastrophe.
Spending like there is no tomorrow. Racking up massive debts that suck away your income and your happiness. Failing to protect your money. Not being diligent about saving money and investing for your future…
A Plan Helps Drive Progress to Retirement Security
For Jim Chilton of SOFA, planning for your financial future is akin to traveling by car. Navigation of the roadblocks, unknowns, and wrong directions along the way comes with the territory.
“Most all of us drive a car. Logically, how would you expect to drive to a destination you’ve never been to, on roads you’re unfamiliar with, and expect to arrive on time without a map, GPS, or written instructions?” Chilton explains. “Our lives, going into the future, are calling for us to go to those unknown places.”
“Retirement, kids’ college, a huge emergency, terrific opportunity, a health scare. The future demands we follow a well-thought-out plan,” he continues. “Would you loan me your car knowing I was going to drive it and I was blind?”
With no financial plan, it’s hard to plot a clear direction for whatever steps you need to take financially. And not just that.
It also means people have no finish line to work toward, no benchmark to evaluate their current progress, and no metric to set future goals.
The Essentials of a Good Financial Plan
Your financial plan doesn’t have to be complicated. Most people can create a good foundation by following the “PRITE” procedure, Chilton advocates. Here is what that means.
Think of your plan as a 5-story building, or with five core elements:
- Estate Planning
“Protection” means your insurance coverages: home, auto, life coverage, long-term care, disability, and so on.
“Retirement” refers to the steps you take to have money for a comfortable retired lifestyle. “Investing” means the investment strategies you pursue to grow your money.
“Taxes” cover two areas: tax planning and yearly tax preparation. And “Estate Planning” means having a will, spelling out who might be your legal guardian in elderly age, and covering other later-life matters.
The foundation of all these parts is cash management, says Chilton. Since the way you handle your money and what you do with it is directly tied to your behavior, here’s an important question for everyone to consider.
Whether you are a wealthy investor or a person just starting your family, ask yourself: “Is your cash managing you, or are you managing your cash?”
As the basis of the PRITE model, it’s a great starting point for evaluating progress in the other parts of your financial life.
If You Don’t Already Have a Plan, Time for Plan B
Of course, not everyone has the same timespan to plan for retirement.
What about people who are in the retirement red zone – approximately 10 years before they retire? It’s time for Plan B. Now isn’t the time to procrastinate but to take action.
Ask yourself these questions: “What is your Plan B?” and “Where do you need your Plan B to get you to?”
For those who wait or put planning off, there can be costly consequences, as Chilton reinforces.
“Plan B tragically starts with, ‘I’m totally screwed because I never stopped to think of this unfortunate consequence that will happen to me because I did not plan,’” Chilton explains. “We need to know it’s our behavior that allows us to shirk this necessity-driven task that we’re called to tackle.”
“Too many of us think, it only happens to others- never us! Talk about denial!”
Retirement, the Next Chapter of Life
Think of your retirement as the next chapter of your life. Consider how many years you have until you leave your last job… and then possibly another 25-40 years in retirement from there.
Here are some questions to ask yourself:
- Where do you currently stand with your finances?
- How will you progress through the next chapter, retirement, financially-speaking?
- What steps can you take today to enjoy more financial security in your future retirement?
- Where will you live in the future?
- How much income will you need?
- What income streams will you rely upon, once you have left your job?
- Do you have sufficient coverage and protection in the case of an emergency, unexpected medical needs, or other sudden situations?
- Do you have a plan in place for transferring estate assets to beneficiaries in case the unexpected happened?
Don’t wait, answer these questions and put those answers to paper. If you need help with answering these questions and with creating a long-term plan, seek professional assistance.
A financial professional can help you walk through the “what ifs,” evaluate your current progress, and lay out a game-plan for where you want to go.
Preparing for Your Future Retirement Security
The bottom-line? Start planning now. Don’t wait until tomorrow or some years down the road.
You will be that much ahead in planning for your future retirement by taking the initial steps today.
One of the biggest problems facing many Americans from a secure retirement is financial illiteracy. If you and your company, organization, place of worship, or community could benefit from pro-bono financial education workshop, check out SOFA’s financial literacy seminars.
They are a powerful way for identifying the financial gaps in our lives and learning real-world strategies to improve our money management.
And if you need help with putting your money matters in order, financial professionals at SafeMoney.com can assist you.
Use our “Find a Financial Professional” section to connect with someone directly. You can request a first appointment to discuss your goals and needs. Should you need a personal referral, call us at 877.476.9723.