Author Starts Saving In Her 30s But Wants To Retire A Millionaire; Financial Advisor Reveals Four Mistakes She's Making

Best-selling author and Bridesmaid for Hire founder Jen Glantz plans to retire as a millionaire and has been working to reach that goal for two years. Glantz understands it is a big task, given that she started savings for retirement in her early 30s. She chalked out a retirement plan that included contributing to a SEP IRA and cutting back on expenses. However, Glantz decided to get her portfolio reviewed by a fiduciary financial adviser, Adam Scherer and realised she needed to make several changes to her retirement plans to stay on track.

1. Inconsistent Contributions to SEP IRA

Glantz set up a Simplified Employee Pension (SEP) Individual Retirement Account (IRA) designed for the self-employed and businesses of any size. Contributors benefit from the annual contribution limit of $69,000 for 2024, much higher than traditional 401(k)s and IRAs. While SEP IRA withdrawals are taxed as ordinary income, an additional 10% tax may apply if you withdraw before 591/2. However, unlike traditional retirement accounts, withdrawals from a SEP IRA can be made anytime, without any requirement for citing a hardship. The self-employed and small businesses also prefer SEP plans since they offer decent income in retirement and don't have the initial setup and operating costs of traditional retirement plans.

Glantz opened her SEP IRA at 30 and contributed to it every month. Over time, she missed payments because she forgot about it or used the cash to buy something else. According to Scherer, the biggest loss of not regularly contributing to the SEP IRA is missing out on windows to buy investments at a potentially lower price, given the market move in cycles of highs and lows. He recommended Glantz automate her monthly contributions to develop a good retirement savings habit and reduce the impact on overall cash flow.

2. Lack of Tax Diversification

Glantz was under the impression that her SEP IRA was sufficient for her retirement plans, which turned out to be a wrong approach. Her adviser highlighted that exploring ways to achieve tax diversification is crucial to avoid hefty taxes on retirement income. Scherer believes that owning assets in different accounts that offer unique tax treatments can help prevent additional tax payments in your golden years. "If your invested assets are located in a single account type, the options available to meet your retirement income needs in a tax-efficient manner become more limited and could result in additional taxation," said Scherer.

Setting up retirement accounts with different tax rules can grow your retirement savings unhindered. For instance, you can combine a tax-deferred account like a SEP IRA to grow your pre-tax money with a Roth IRA for tax-free retirement withdrawals. However, Scherer suggested that individuals can change the contribution amount to each retirement account based on their financial goals as they near retirement, like "33% in taxable accounts [brokerage], 33% in tax-free accounts, 34% in tax-deferred accounts."

3. No Retirement Income Plan

Millions of Americans rely on Social Security to get by. Furthermore, most of them tap into Social Security benefits right when they are eligible at 62, which locks them into lower monthly income for life than those withdrawing at 70. More worryingly, Social Security benefits could fall significantly in the next decade as retirement trust funds deplete rapidly.

Becoming a millionaire by retirement doesn't mean that it will help sustain your lifestyle until you live. Rising healthcare and overall living costs, combined with delayed starts to retirement planning, are forcing many retirees to get back to work. Scherer helped Glantz realise that she must consider the most important variables to reach her retirement goals. Some parameters include current earnings, years to retirement, expected duration of retirement life, inflation impact, monthly expense estimates, emergency funds, and the required returns from investments to sustain your pre-retirement lifestyle.

Scherer said one could use a retirement calculator or team up with a financial adviser to address these factors. A fiduciary financial adviser will also strive to understand one's risk appetite and liabilities to create a long-term retirement plan while protecting one's investments from market upheavals.

4. Inadequate Income Streams

As a self-employed individual, Glantz earns from her businesses and side gigs. However, Scherer pointed out that one requires sufficient earnings to spend on products they value today and save for the future. Hence, creating passive income streams through income-generating investment vehicles can improve one's monthly cash flow and meet spending and savings goals.

There are several ways to generate passive income, such as investing in dividend aristocrat stocks, interest-bearing bonds, rental properties, or becoming a business partner. However, "these alternatives need to be reviewed and selected only if they align with your overall retirement strategy and personal values," Scherer concluded.

Is $1 Million Enough To Retire With?

The 2024 Planning & Progress Study from Northwestern Mutual revealed that most Americans believe $1.46 million is enough to retire comfortably. However, equity fund manager Grant Cardone explained that a million dollars was a lot of money in 1960, but today, you can go broke even with that much in your accounts. The value of the fiat currency has declined over the decades, and a million dollars is worth only 10% of what it was then. His estimates meant one would need $10 million to feel wealthy today.

Like Scherer, Cardone recommended building passive income streams that should at least equal your annual pay. Achieving this milestone would require investing in stock markets and other asset classes for consistent, strong returns over the years. Stock markets expose you to market risks, which can be challenging to manage, especially during sharp stock price corrections. While fiduciary financial advisers can help you pick the right stocks, they play a far more critical role in keeping emotions out of financial planning. People lose thousands of dollars, if not more, every year due to poor financial decisions, especially those made in haste when markets fall.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.