Go beyond tax season with a financial plan

Read time: 3 to 5 minutes

Tax season will be here before you know it. As you think about your current financial situation and what you might want to do differently in the coming year, it’s important to consider your long-term goals—and include your financial plan in your tax strategy. Why? Your future self is counting on it.

Advice from retirees

In a recent study, U.S. retirees were asked what financial advice they’d give their younger selves. Most wished they’d created a financial plan earlier in their working lives. And about half admitted they hadn’t anticipated how much taxes could affect their income in retirement.¹

Read on to discover how having a financial plan can set you up for long-term success—and help you avoid tax surprises in retirement.

Tax surprises in retirement?

Almost 40% of retirees say they’re paying different taxes than they’d expected in retirement, and the majority of that group said the taxes are higher than they’d expected.¹

How does that happen?

Many Americans save pre-tax money in their retirement plan. This type of savings lowers your taxable income when you contribute the money to the plan because you don’t pay taxes on it then. But you do pay taxes on pre-tax money when you take it out, ideally in retirement.²

YOUR PRE-TAX SAVINGS

You’ll have the option of taking your pre-tax money out without an early withdrawal penalty once you reach age 59½. But you must start withdrawing it at age 73. These planned withdrawals are called required minimum distributions, or RMDs.

No matter when you take the money out, it adds to your income that year. And that can put you in a higher tax bracket than you were expecting. It’s important to keep all this in mind when planning your retirement income strategy. And the earlier you start planning, the better.

How can a financial plan help?

A financial plan can help you save for retirement in a smart and organized way and ensure you have the income you need—now and in retirement. It can also help you prioritize your financial goals and determine how to reach them.

What should you consider when making your plan?

Whether you already have a financial plan or you’re ready to create one, here are some retirement plan saving tips to keep in mind:

Save more now

Vanguard suggests saving between 12% and 15% of your pay. If that feels like a big lift right now, try bumping up your savings by just 1 or 2 percentage points when you can. In a recent survey, about 70% of retirees said they would have adjusted their spending habits to save more during their working lives.¹

Meet your employer’s match

Some employers will match your plan contributions up to a certain percentage—which means you’ll get more money in your account in addition to what you save yourself. If your plan offers an employer match, it’s important to save enough to get the full benefit.

Think about saving Roth after-tax money

If your plan offers this option, you’ll pay the taxes now when you save Roth money, and you won’t lower your taxable income in the year you contribute. When you take the money out in retirement, both your contributions and your earnings will be tax-free, as long as you’re at least age 59½ and you’ve had a Roth account for at least 5 years.²

By the way, you can save a combination of pre-tax and Roth money in your retirement plan. Some investors choose to save some of each so a portion of their savings offers the tax advantage that works best for them.

Invest your money appropriately

You should invest in the mix of stocks, bonds, and other investments that matches your time horizon and comfort with financial risk. Plan to check in on your mix every now and then, especially if your goals change.

You don’t have to figure it all out alone

Vanguard Digital Advisor® can help you plan for your financial future now. But you’ll need to update your investor profile to get the most out of the service. It only takes about 5 minutes! You’ll answer a few questions about things like your planned retirement age, how long you expect to be retired, and your current tax filing status. Then, a short risk survey will help you understand your comfort with financial risk.

Once you finish updating your profile, Digital Advisor will put your unique saving and investing plan into action. And if your financial situation changes, Digital Advisor will automatically adjust your investment mix to fit your new circumstances. And Digital Advisor can do more than just help you plan for your retirement. The service can also manage your savings in retirement to help make sure your funds last as long as you need them to.

Plus, when you update your investor profile, you’ll unlock powerful financial planning tools that can help you save for an emergency, pay off debt, and optimize your Social Security benefits.

Don’t leave tax season to chance

It’s important to keep your financial plan in mind during tax season—and take advantage of all the planning resources available to you, especially Digital Advisor. Your future self will thank you!

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Need extra help?

About 4 in 10 retirees followed a financial plan throughout their working lives, and 65% of them created one with a financial advisor’s help. With a plan and an advisor, this group of retirees was less likely to regret the saving habits they followed during their working years because they felt satisfied with their financial situation in retirement.

Most importantly, 90% of these retirees felt that the value of working with a financial advisor outweighed the cost.¹

If you qualify, Vanguard Personal Advisor® can provide you with one-on-one financial advice.³ An advisor can work with you to create a financial plan that helps set you up for retirement success. Plus, they can assist you with any financial questions that come up along the way. And you’ll pay less than one-third of what you’d likely pay for financial advice somewhere else.⁴

Learn about switching to Personal Advisor

Whenever you invest, there’s a chance you could lose the money. Diversifying means having different types of investments. It doesn't guarantee you'll make a profit or that you won't lose money.

¹Source: EBRI (Employee Benefit Research Institute). Retiree Reflections. 2022.

²Taxes: Taking money from your retirement account can affect how much you’ll have to pay in taxes. You’ll owe taxes on pre-tax money. You won’t owe taxes on Roth earnings as long as you are age 59½ or older and it’s been at least five years since your first Roth contribution. If required by law, Vanguard will withhold some taxes for you. You may need to pay a 10% federal penalty tax if you take money out early.

³To be eligible for Personal Advisor, you must have one of the following:

$250,000 or more in your employer-sponsored retirement plan at Vanguard.
$50,000 or more in IRAs and taxable accounts—owned individually or as joint tenants with rights of survivorship—at Vanguard.
$250,000 total among your employer-sponsored retirement plan, IRAs, and taxable accounts—owned individually or as joint tenants with rights of survivorship—at Vanguard.

⁴Source: “2023 Robo-Advisor Landscape” by Amy C. Arnott, et al. © 2023 Morningstar, Inc. All rights reserved. Average fee listed in Morningstar’s annual Robo-Advisor Landscape report when receiving advice through a traditional human financial advisor. Note that full-service advisors may provide a different fee structure, like a flat fee or tiered-fee structure based on the level of assets being managed, and may require a minimum asset level to manage the accounts. The average fees do not consider other costs, including underlying product costs, transaction costs, or other account costs.

Vanguard Digital Advisor's and Vanguard Personal Advisor’s services are provided solely by Vanguard Advisers, Inc. (VAI), a registered investment advisor. Please review the Vanguard Digital Advisor and Personal Advisor brochure for important details about these services. Vanguard Digital Advisor’s and Personal Advisor's financial planning tools provide projections and goal forecasts, which are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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