Advice and the Advisor

It's never too early to save for retirement

As soon as your child is old enough to start filling up a piggy bank, they can begin saving. When the piggy bank is full, set up a savings account and let them manage it.
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A famous person once said: "People don't plan to fail, they fail to plan."

To that point, financial experts stress that planning for retirement should start early to build up a solid financial cushion along the way. While saving on your own takes some serious discipline, even small amounts saved will add up over time.

The amount of money that a person needs to save for retirement depends on a variety of factors: income level, rate of returns on investments, the age they start saving and their desired retirement age. The later you retire, the lower the required saving rate.

How to retire with millions

I had an opportunity to discuss retirement savings with Richard Coppa, the managing director of Wealth Health LLC. Coppa has been specializing in advising wealthy executives and business owners in financial planning, estate tax planning and wealth management for more than 10 years. Since beginning his career as a tax attorney, he has serviced the needs of many high-net worth individuals and families. He urges individual investors to be more proactive when it comes to self-funding their retirements.

Q: How early should people start to save for retirement?

Coppa: It is never too early to start to save for retirement. I counsel clients to begin as early as they receive "earned income." This is true for clients' children who have earned income from even summer jobs; they can invest in a Roth individual retirement account. (Sometimes the parent will make the contribution on behalf of the child.) This will set the stage or create a mindset that starting early is important and creates a path to successful retirement planning. Most people start when they have a new job and are offered a 401(k) plan. It is important to at least participate in a 401(k) or IRA even if it is small dollar amount to start to create the habit that your cash flow should have a line item for retirement just as you would have one for a mortgage or household expenses.

Q: What type of questions should investors ask of their advisor or themselves when it comes to creating a long-term retirement plan?

Coppa: First and foremost when creating a long-term retirement plan investors need to be honest about creating a realistic cash flow/budget.They need to know what they expect to spend in retirement.They need to consider lifestyle changes, like where they might want to live, cost of living changes and things they may do more or less in retirement, like travel. 

They also need to look at whether they will be financially assisting their parents or children and their goals for leaving money to heirs or to a charity. This is the foundation to making successful projections that they may or may not be able to attain.

Threats to your retirement

Investors should ask advisors what rates of returns they are using for stocks and bonds within the projections. I suggest being conservative. Investors should consider income taxes in their projections as income taxes play a large role in what after tax income will be to support their cash flow.  

Q: What are some common misconceptions people have when it comes to qualified retirement plans?

Coppa: The most common misconception people have with regard to their 401(k) plans is that they believe it is not worth it because their company doesn't match their contribution. This could not be farther from the truth. Regardless of the company match (which would be nice) it still makes sense to contribute whether it is for tax-deferred growth on a traditional 401(k) or for tax-free growth on a Roth 401(k). It is the most beneficial way to save for retirement.

Many investors also may claim that since their 401(k) does not allow for individual stock purchases, they rather invest outside their 401(k). I would recommend that someone first contribute to a 401(k) diversifying across the funds offered within the plan and any excess cash be invested in a taxable account where individual stock purchases can be made.  

Q:  What mistakes do you see when people look to rollover an existing IRA or past qualified plans to a new self-directed plan?

Coppa: The most common mistake investors make within their 401(k) is the improper allocation of their contributions. All too often you see someone who either has their money all in a cash account taking no risk or all allocated in one or two funds taking on too much risk.

Some plans are offering default allocations so investors do not take too much or too little risk depending on their age. Investors are sometimes overwhelmed or just don't take the time to allocate their contributions.

Also, many investors have old 401(k) plans from former employers and they fail to pay any attention to their plan balances, the allocation, changes to the investment offerings, etc. We usually recommend rolling the old 401(k) to an IRA for more control. 

Many people even forget about their old 401(k) because they no longer work for the former employer or no longer have access to the company benefits website. Finally just setting an allocation is not enough.

(Read more: 401(k) plans are underfunded)

Individuals also need to periodically rebalance the current contributions as the market , over time, will alter the asset allocation. Investors may be taking on too much or too little risk as a result of market moves even though you set your asset allocation for contributions.

Q: When do you start to discuss long-term-care insurance costs with clients? Is there a "good time" for someone to look to purchase LTC coverage?

Coppa: LTC insurance is a tricky subject. The premiums for many of those insured, who purchased policies years ago, have increased over recent years. Basically, insurance companies have seen people living longer and the cost of care has increased dramatically relative to their projections made years ago.

In fact, many companies no longer even offer LTC insurance. For people considering LTC, I recommend considering it in their late 50s when premiums may not be as high as compared to waiting until their late 60s. It also makes sense to get LTC coverage when your health may be better. Many people also look to obtain LTC from their employer group plan. I suggest these people inquire as to the options at the time of termination or retirement from the company and their ability to convert the policy to an individual plan.

Q:  When should people start to think about taking Social Security benefits?

Coppa: Social Security benefits can also be fairly tricky. People should start to consider Social Security when they near 60 years old. Not that they will begin their benefit at that time but they should begin to understand their options so they can make informed decisions.

Full retirement age and receipt of full benefits depends on someone's year of birth. Full retirement age is between 65 and 67. For baby boomers born between 1946 and 1964 full retirement age is 66. The earliest you can receive benefits is age 62 but benefits will be reduced between 20 percent and 30 percent, depending on someone's year of birth.

(Read more: A look at retirement for baby boomers)

Delaying your receipt of benefits can increase your income by 8 percent per year of delay after the age someone is eligible for full benefits.

Finally a spouse who has not earned as large a benefit as their spouse may be better off taking 50 percent of their spouses benefit if it is greater than their own

So there is a lot of detail to taking Social Security benefits. The key is to start early to think about it. It's important to review the annual Social Security statement showing the anticipated benefit and consider one's cash flow needs, spousal eligibility and also life expectancy to make an informed decision as to whether to start early, at full retirement, or to delay until age 70. 

—By Jim Pavia, Follow Jim on Twitter @jimpavia.