We’ve written previously on why rising executives, business owners, and other professionals should start thinking and planning for retirement as early as possible. The sooner you can begin making contributions to your company-sponsored 401(k) or other tax-advantaged retirement accounts, the more time you’ve got for those funds to grow and compound, building a more secure foundation for the kind of retirement lifestyle you want.
But retirement planning isn’t the only place that getting an early start can benefit you. Especially for those positioning themselves for executive compensation packages, including stock options, deferred compensation, and others, establishing a sound, comprehensive financial plan early in life provides a number of benefits, even before and beyond the retirement years.
Time and Uncertainty
As we all know, time is the one vital resource that cannot be bought or sold. We all have the same amount of it, and yet so many fail to make the best use of this irreplaceable asset. Additionally, for high-achieving, high-earning individuals, the emphasis often gets placed on earning: the more money you can make, the more “security” you have. But the problem with that assumption is that it doesn’t adequately consider the implications of time. Everything about the future is uncertain—including the amount of money you’ll be able to earn. Industries rise and fall; health can fade; personal circumstances can change; and these, plus many other changes, can exert an effect on your earning power that you cannot always control.
Here’s another problem with equating earnings and security: high earners—like everyone else—can easily fall into the trap of “lifestyle inflation”: gradually increasing spending as income grows. If unchecked, lifestyle inflation can rob you of your ability to save and invest meaningfully.
Benefits of an Early Start
This means that the sooner you can begin building a reserve for the future, the less dependent you’ll become on your current or future earning power. In fact, the sooner you establish your financial plan and begin putting it to work, the sooner you may be able to do less of the work yourself and begin letting your assets do more of the work for you.
1. The “magic” of compounding. When it comes to putting money to work, time is of the essence. Consider, for example, an individual who is 25 years old and earning $80,000 per year. If she puts aside 10% of her income in savings and investments—about $667 per month—and is able to earn a long-term average return of 8% on her accounts, she will have just over $2 million by the time she reaches 65. Even better, by the time she reaches age 55, she would have nearly $1 million. If she chose, she could take an early retirement and, still assuming an 8% rate of return, enjoy an annual income of about $80,000 from the earnings on her savings alone.
But what if that same person waited until age 35 to begin putting aside those savings? With the same savings amount and the same average return assumptions, she would have less than $1 million by age 65, reducing her nest egg by more than 50%. That adds up to a high cost of waiting.
Admittedly, the above, simplified example doesn’t take taxation and other matters into consideration. But it does point out the power of systematic savings over time for establishing a solid financial future.
2. Forming the right habits. Perhaps one of the greatest benefits of having a financial plan in place early in your career is its ability to help you stay focused on your most important goals. When your plan is built on what is most important to you—whether that means ensuring a secure retirement, paying for a child’s education, saving to start a business, or even establishing a philanthropic legacy—you are much more likely to keep those goals top-of-mind. At that point, your financial plan provides you with the incremental steps that lead to achieving those value-driven goals. As we all know, positive decisions and actions performed repeatedly lead to the formation of positive habits. The earlier you can put yourself on the path to your desired destination and begin systematically following that path, the greater your chances of success.
3. Gaining financial literacy. For those with important financial goals, financial literacy is vital. One of the most common attributes that sets those who are financially secure apart from those who aren’t is a good working knowledge of financial basics such as budgeting, the mechanics of saving and investing, the importance of accounting for inflation, the time value of money, and the types of debt to avoid. This is where a relationship with a professional, fiduciary financial advisor and planner can be very beneficial. By serving as your “money coach,” a qualified financial advisor can help you acquire the knowledge and behaviors that can help you get better control over your financial life. The earlier you can acquire that knowledge and those behaviors, the better.
4. Avoiding “unforced errors.” Especially for high-achieving executives and others with access to stock options, deferred compensation, and other forms of executive compensation, a financial plan that takes into consideration the tax and other implications of these forms of income can help you avoid unnecessary taxation in future years. When you have a plan in place early, you’re better able to anticipate future developments, such as changes in the tax code that could necessitate revisions in your plan. Your financial plan can also help you guard against making wrong moves, either in the type of assets you own or in the timing of asset sales and purchases. In fact, the emotional discipline and confidence that can accompany a financial plan can be one of your most important protections against the types of behaviors that work against wealth accumulation.
At Optima Asset Management, we work with high-achieving individuals and families to create plans that can help them reach their most cherished goals. To learn more about how a well-structured, individually designed financial plan can benefit you, please reach out to your Optima advisor.
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Disclosure: The foregoing content reflects the opinions of Optima Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Investment returns cannot be guaranteed. Any references to returns are illustrative only and not representative of any particular security or investment portfolio. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
