Matt Stead
There’s some understandable confusion about the difference between retirement planning and financial planning. Sometimes people might use these phrases interchangeably, not realizing that they have distinct meanings. After all, doesn’t a financial planner help you prepare for retirement? And don’t your retirement plans affect how much money you have to spend and invest right now?
While retirement planning and financial planning are technically different practices, they’re closely connected. Financial planners often provide retirement planning services, while some advisors focus entirely on retirement planning. Both services can help you maximize your money, and give you the peace of mind that comes with knowing you’re financially prepared for whatever the future has in store.
Retirement Planning vs. Financial Planning: How They Differ
Financial planning is about the big picture. It’s about creating a roadmap for the rest of your financial future. Financial planners dig deep into their clients’ finances and goals to create customized plans for how to save, spend and grow their money, then help clients adjust those plans as life changes.
Financial planning can accomplish a lot of things and encompass a lot of different conversations. Building and protecting wealth is generally a primary focus of financial planning. Financial planners may do things like help their clients evaluate investment options depending on how much risk they want to take. They might help parents or grandparents with education planning, making recommendations about what kind of education accounts to open and identifying the most tax-advantaged ways to set money aside for a child’s future. Financial planners may also help clients create household budgets, pay down debts, evaluate major asset purchases, make decisions about employee stock options and establish charitable giving strategies—all with an eye toward minimizing taxes. Essentially, they can offer guidance about nearly any financial questions that come up for their clients.
Retirement planning is a subset of financial planning that’s specifically about (you guessed it) preparing for life after you’re done working. Advisors who help clients with retirement planning have deep knowledge around Social Security benefits, employer retirement accounts, pensions and other retirement savings vehicles.
So what does retirement planning involve? It’s different for everyone, and a client’s stage of life and specific retirement goals will affect the kinds of things their planner might talk to them about. (A 30-year-old probably doesn’t need to have the same kinds of discussions around Social Security that a 60-year old does, for example.) But generally speaking, retirement planning is centered around making sure that you have more money than expenses in retirement, and that you don’t outlast your money no matter how long you live.
During retirement planning, advisors help clients strategize around questions like when they can afford to retire, when they should take their Social Security benefits and how to maximize their pensions. Planning for health care expenses and long-term care needs is part of the process too. You and your retirement advisors might talk about allocating money for those expenses and/or evaluate long-term care insurance as part of your comprehensive retirement plans.
Ultimately, retirement planning is about maintaining your quality of life once you’re no longer working – both financially and emotionally. It’s about making sure you have answers to the three questions identified by MITAgeLab as indicators of how prepared you are for retirement: Who will change your light bulbs? How will you get an ice cream cone? Who will you have lunch with? In other words: How will you protect your independence while getting the care and social support that you’ll need? Where will you live, and what will you do for fun? And what plans need to be put in place now so your vision of retirement matches your reality?
Retirement Planning vs. Financial Planning: How They Work Together
Financial planning and retirement planning have to happen in tandem. There’s no point in crafting a thoughtful, detailed plan for your retirement if you won’t be able to afford it. Financial planning helps you build as much wealth as possible while you’re working, and gives you real numbers and projections to work with for retirement planning. The less guesswork that’s involved, the better. This is why clients often choose to work with financial planners who also provide retirement planning services.
Your financial plans and retirement plans will both evolve throughout your career, and they’ll continue to be intertwined. When you change jobs, or buy a vacation home as a long-term investment property, or make any other significant financial moves, your retirement plans will likely be affected. Say you decide to start a business or invest in real estate, and consider pulling money out of your 401(k) to do it. Your retirement will be affected if your investment fails—so you and your advisors might talk about ways to pull money from other sources, or devise a new strategy to increase your retirement savings.
Estate planning also intersects with both retirement planning and financial planning. What will happen to any money that you don’t spend during your lifetime? How can you pass remaining assets to your loved ones with minimal taxation? These are issues that you can address whenever you’re working with advisors to make plans for your financial future.
Both financial planning and retirement planning are valuable services, even for young professionals who have decades left in their careers. Creating a financial roadmap can help you afford the life you want right now, and save for the life you want in the future. And working with advisors you trust makes the process fairly painless.
Sachetta Callahan works with clients to create financial plans that serve them through all stages of life, from young adulthood through retirement. Our holistic approach means that our advisors look at each client’s full financial picture, priorities and personal goals before making any recommendations.
How can we help you make the plans that take you where you want to go? Contact us today!
Matthew Stead, MSFP joined Sachetta in 2014 as an intern. He now serves as a financial advisor, the go-to office IT person and the host of Sachetta, LLC's podcast Fine Answers.