Controlling Your Financial Future: Starting Early, Retirement Planning, Estate Planning

Starting Early

When you are young, you think you don’t have enough money to invest. Your initial steps into the working world also come with more expenses. Now that you finally have the money to buy that cell phone, TV or the car you always wanted, your salary or income disappears faster than you realise. Keeping some money aside for investing may feel unimportant. So you may think why not start investing a few years later when you have more money to spend and save? Unfortunately, this cycle never ends. By the time you realise the importance of investing, you may lose the advantage of time by your side.

Even a small amount can create a big value if given enough time.

Investing early can give you a big advantage. You can not only plan your investments but also give them enough time to grow into a corpus that meets your financial goals.

Power of compounding

Compounding essentially means reinvesting the profits from your investments to make your investments grow exponentially. Let us say you start with just Rs1 that keeps doubling every day for 25 days. How much do you think will be the final amount at the end of the 25th day? From Rs 1 it will go to Rs 2 the second day, Rs 4 the third day and so on, reaching a phenomenal amount of Rs 1.67 crore rupees on the 25th day!

This is the power of compounding. However, if you follow the same example for 20 days, then the amount is just Rs 5.24 lakh ‘96% less than what you get after 5 more days. This shows that when giving your investments the power of compounding, giving enough time for them to grow is equally important.

Benefits of compounding

So how do you take advantage of the power of compounding in your investments?

Make sure you start investing, even small amounts, as soon as you start earning for compounding to work.

Avoid any withdrawals as it reduces your invested amount, giving lower returns.

Consider an example:

Mayank and Vivek are brothers. Mayank is 25 years old and starts a Systematic Investment Plan (SIP) of Rs 5,000 per month in a mutual fund, with growth option (which means returns will be reinvested for compounding to work). SIP essentially means that he does not need to have a large sum to invest in a mutual fund. He can instead break it into monthly regular parts for his investment.

Meanwhile, 30-year-old Vivek also starts the same SIP with Mayank. They both want to keep investing till they retire at 60 years. Assuming they got an average return of 9% each year when they both turn 60, Mayank’s accumulated amount would have reached Rs1.35 crore and Vivek’s amount will be Rs 85.7 lakh rupees. So by starting just five years earlier, Mayank will get Rs 49.9 lakh more than Vivek!

This simple example shows that if you start early, invest regularly and avoid withdrawing from this accumulating amount, your investment will grow manifold. This will enable you to create wealth and fulfil your financial goals in life like buying that dream house, funding your child’s education or your own retirement in a much easier way.

Retirement Planning

1. Peace of Mind

This is by far one of the most important benefits of retirement planning. Planning ahead not only reduces your stress during retirement but also in the years leading up to it. The lack of planning can leave a cloud of uncertainty around the topic that can create an unnecessary level of stress.

2. Contextualize Pre-Retirement Decisions

If you take the time to plan for your retirement early on, you will be able to make more efficient career-related and general financial decisions prior to retirement with appropriate planning. Is it better to stay at the current law firm or start your own practice? Will the mid to late career degree, license or other credential make sense monetarily? These decisions may be different for someone with fifteen years to retirement compared to someone with only five years until retirement.

3. Getting on the Same Page

One of the benefits of early retirement planning is that you can make sure your plans work well with other relevant parties. It’s never too early to make sure that you and your spouse are on the same page with spending and lifestyle desires in retirement, but your significant other may not be the only family member you may wish to have a conversation with.

Some retirement plans are often affected by a saver’s desire to meet other objectives such as assisting an adult child in starting or acquiring their business. To the extent that these goals may affect your own retirement savings, you will benefit from planning beforehand.

4. Tax Benefits

There are several tax benefits of retirement planning, including reducing the amount of income taxes you will pay during retirement and ensuring that beneficiaries to retirement and other account types pay as little tax as possible.

One of the key areas that many people overlook during their life while saving for retirement is tax diversification. This involves establishing different “pools” of money in accounts that are taxable, tax-free and tax-deferred. These different accounts allow income during retirement to be strategically withdrawn from a variety of sources depending on future conditions.

One retirement saver who only has a tax-deferred account (a traditional IRA, for example) may pay substantially more in taxes for the same withdrawal amount as another saver with a traditional IRA, Roth IRA and regular taxable funds. The earlier your planning begins, the easier it is to establish and grow your funds among these available “pools” of money.

5. Cost Saving

There are many ways to reduce costs with appropriate planning. Many of the insurance policies you may need (long-term care, etc.) can be acquired at a lower premium when younger and in good health rather than waiting until retirement and risking a higher rate or denial of coverage.

Those who know where they would like to reside geographically often wish to examine options other than buying at the time they retire. Would it make good financial sense to acquire the property in the desired retirement location in advance and rent it out until retirement? How much time do you need beforehand if you plan to build a new property? Early retirement planning can increase the likelihood that your goals are met with the least cost.

6. Viewing Financial Issues in Context

One of the greatest benefits of planning, in general, is that you can determine how all your financial objectives relate to one another rather than evaluating them in isolation.

What are the tax consequences of my investment decision? How will the decision to purchase additional insurance affect my contribution to saving? How do these issues affect my heirs?

Think of your financial decisions not as a series of yes/no decisions unrelated to one another, but as many competing interests, each of which is affected by the rest.

7. Legacy Opportunities

Planning for retirement can also provide benefit to your heirs or your favorite charitable causes. View your legacy in total, not just the distribution of your assets at death to various beneficiaries. Your wishes may be more complex than you think.

Perhaps your retirement decision involves unwinding or selling a business you’ve started. You may find your decisions affect not just yourself but many employees. Perhaps you have charitable interests and plan to commit a certain amount of your worth to various causes.

By planning beforehand, you may be able to take from sources (during life or after) that have the most favorable tax consequences, thus giving in the most efficient manner.

Estate Planning

Provide For Your Family

Without an estate plan in place, your family will get less and it will take them longer to get it. This means your loved ones will be left in limbo and might end up without enough money to pay bills and other living expenses. It’s not uncommon for families with an unexpected death to nearly fall apart due to the financial strain in the weeks, months, and years to come.

Good estate planning will make sure that your family is provided for and not left to face financial ruin once you’re gone.

Keep Your Children Out Of Child Protective Services

As unpleasant as this next thought is going to be, take a minute and ask yourself what would happen to your kids if you and/or your spouse were involved in a major car accident on the way home from work tomorrow?

Really, think about it. Who will pick them up from school or daycare? Where will they sleep that night and the nights to come? Who will ultimately end up as their guardian?

If you don’t have an estate plan in place, than you might not like the answers to these questions. Why let your kids end up in Child Protective Services while the courts sort out who will serve as their guardian?Why leave that decision up to the courts at all? Do you really want a judge to decide who will raise your kids without any input from you or your spouse?

Minimize Your Expenses

Do you know where most of the money goes when people don’t have a good estate plan? Attorney’s fees and court costs.

When you die without an estate plan (and without a living trust, in particular) the courts are forced to handle everything: the distribution of your property, the guardianship of your children, the dissolution of your business. This is known as “probate,” and it get’s very expensive easily exceeding $10,000 for even modest estates. That’s money your family and kids could’ve used for living expenses and other bills, but instead it’s just lining the pockets of your attorney.

Get Property to Loved Ones Quickly

You have two options here. Option 1, your family has to wait anywhere from 3-9 months to get anything after you die. Option 2, your family gets money they need to pay bills, to pay for your funeral, to pay for your outstanding medical bills, and to pay for anything else they need right away and without delay.
Which one would you choose? Good estate planning let’s you avoid the big delays that can put a real financial strain on your family.

Save Your Family From The Difficult Decisions

Can you imagine trying to decide when to pull the plug on your spouse who is in a coma or similar condition? Or deciding how his or her remains should be handled?

Those are heart breaking decisions that no one should have to face. You can ease this burden by thinking about this kind of thing in advance and planning ahead for it. You can specify in your estate plan how you want end-of-life care to be handled and what kind of disposal arrangements you want made for your remains. And there’s no one better to make those decisions than you.

Reduce Taxes

Every single dollar that you pay in taxes is one less dollar that your family will have for paying bills and other expenses. There are numerous tax reduction strategies that you can use to keep as much money in the hands of your family as possible.The key is to start tax planning sooner rather than later and definitely not to wait until it’s too late.

Make Retirement Easier

You might be surprised to hear that estate planning can actually benefit you while you’re alive, not just your family after you’re gone. Healthcare in particular is an area where estate planning can benefit you enormously down the road by making sure you’re eligible for government benefits like Medicare (that you’ve been paying into most of your working life anyways, so you might as well get something back), that can significantly reduce your healthcare costs and leave more money to your loved ones.

Plan For Incapacity

Estate planning is not just about death. It’s very common for people to become incapacitated by an accident or sudden medical episode like a stroke that leaves them unable to manage their financial affairs.

If this happens to you, who will take care of paying your bills or managing your healthcare? A power of attorney designation for both financial and healthcare decisions can save your family a lot of time and money and make sure everything is handled according to your wishes.

Support Your Favorite Cause

You might have heard that Mark Zuckerberg (the founder of Facebook) decided to join Bill Gates and Warren Buffet in leaving the vast majority of his fortune to charity instead of his family. Even though you don’t have billions of dollars to leave to charity, you can still make a difference by supporting your favorite educational, religious, or other charitable cause. Even if it’s just a hundred dollars, that money can help others and make a difference in their lives.

Make Sure Your Business Runs Smoothly

If you are a small business owner, then you absolutely must have an estate plan. It’s one of the most important things you can do and is really not optional. Without one, your business will likely fall apart quickly and completely if something happens to you, and that can cause incredible financial hardship on your family.

You have the opportunity to provide for an orderly transition to someone else and continue the business by spelling out what happens if you become disabled or die. Don’t do a disservice to your family by leaving these kinds of ends untied.