Last month, we introduced the three keys to a successful retirement strategy. If you missed it, you can read it here. It’s a great way to understand the main components of a retirement strategy that will work with your needs. This month, we will take a deeper look into the first key of retirement strategy: saving.
Business owners and investors frequently ask me the same question: When should I start saving for retirement?
My answer is the same every time: It’s always a good time to start building a nest egg—particularly for entrepreneurs who are looking to exit a business as part of their retirement plan. Savings not only provide a backstop against unforeseen expenses and emergencies, but also allow for wealth creation over a long-term investment horizon.
The first step to any successful retirement strategy is saving money. As to when to start saving—and how much is enough when it comes to saving versus investing—the first rule of thumb is to avoid ‘rules of thumb’. What’s right for one person isn’t always enough for the next, and the idea that one standard trajectory ensures a financially sustainable retirement discounts the realities and uncertainties in life that come along.
My first advice to clients when it comes to saving for retirement is simple: save as much as you can when you can. Pay yourself first to cover your expenses, make sure that you always have ample liquidity to cover an emergency expense, and then whatever you have left—invest intelligently for the long term. Based on the rule of compounding interest, the sooner you start the better, even if it’s just a few hundred dollars a month or a percentage of your annual salary that you stick to in advance. Over 10, 20, 30 years, every dollar matters.
Living within your means is another important part of wealth creation, which is why day-to-day budgeting and expense planning are critical to a long-term retirement strategy. It’s also essential to ask the right questions of your wealth advisor or retirement specialist as early as possible. Questions such as how much should I invest based on my current income and expenses, am I going to have enough to retire, and am I going to outlive my assets, can all be answered with a financial plan. It is impossible to know you have arrived when you don’t know where you are going.
Another key element of a successful retirement strategy is to leverage the benefits of matching employer retirement plan contributions. For employees, matching contributions are “free money” and taking advantage of every extra dollar compounds over time. No matter where you are in your career or retirement planning, one rule always holds true: never leave anything on the table.
For small business owners and employers, educating employees on the value of matching contributions and empowering financial literacy over the long term attracts better talent, retains the best and brightest, and creates a culture of savings that ultimately results in a more engaged and productive workforce.
Entrepreneurs banking on selling the businesses they’ve built and a successful succession plan for retirement should always know that one thing is certain: financially stable and prosperous employees translate into a more profitable bottom line—which means a more profitable exit.
For more information on First American Bank’s Retirement Plan Services, click here.
