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How financial advisors can help clients with retirement by planning early

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Retirement may feel like a distant prospect, and there are always things to spend on now. But since more than half of Americans born today are expected to live to 100, saving money to fund a secure and vibrant lifestyle in retirement should begin long before people become retirees, according to an Edward Jones study. 

Edward Jones and Age Wave say that retirees, on average, start saving for retirement at age 38, but in retrospect, they should have started saving nearly a decade earlier, at age 29. Experts also recommend saving 15% of earnings as soon as one is regularly employed because saving early maximizes compounding investment returns and eventually retirement income.

“Even adding five extra years to your work career, or adding $5,000 per year in savings, that power of compounding does really make a huge difference.” said Mona Mahajan, senior investment strategist at Edward Jones. 

For retirees that find themselves most active, purposeful and prepared for retirement, 52% currently work with a financial advisor and 78% say they are in great shape financially. On the contrary, among individuals who are least prepared for retirement and overall feel the least positive about life, only 8% work with financial advisors, according to the study. 

Advisors can be instrumental in interpreting current market conditions and developing holistic financial plans to better financially prepare for a 100-year lifespan, as well as the expenses that come with it. For the younger generation, having a trustworthy financial advisor who has gone through market cycles will help prevent investors from making emotional investment decisions and from withdrawing from retirement savings early, Mahajan said. 

Previous generations of American retirees relied on a combination of employer pensions, Social Security, and their personal savings and investments. While guaranteed pensions remain the norm in the public sector, most private-sector employers have replaced defined benefit pensions with 401(k) and other defined contribution plans relying heavily on employee contributions, according to the study. 

Over the past decades, the number of Fortune 500 companies offering guaranteed pensions declined from over half to about 16%, according to a 2018 report. Meanwhile, the long-term benefits structure of Social Security may be uncertain as the ratio of current workers contributing to current retirees receiving benefits continues to decline and is predicted to reach a low of 2.3 workers per beneficiary in 2035, versus 16.5 in 1950, according to the 2021 data from the Social Security Administration. 

And while Social Security provides an important safety net, the average monthly benefit of around $1,600 is far short of what it takes to live comfortably in retirement. In addition, most people do not maximize their retirement account contributions, with many penalized for early withdrawals. And 22% of Americans eligible for retirement plans don’t contribute at all, according to the study. 

“Social Security is probably going to be a bigger and bigger part of the budget, but I don’t think there’s a high likelihood that Social Security is going away because a lot of the voters who consistently vote are people receiving Social Security,” said Mallon FitzPatrick, managing director, principal and head of wealth planning at Robertson Stephens. “But what the government is more likely to do is perhaps a slight reduction over time, and more and more of investors’ or retirees’ money is going to come from personal plans rather than Social Security income.”