Convincing clients to make an effort to put together savings – whether for emergencies or retirement -- can be difficult. They constantly face other regular expenses like rent, insurance, cell phone, cable, student loan and credit card bills. And there is always something else to add to the list.
Handling today's bills makes it hard for people to get comfortable enough to reserve a portion of their income for the future, a seemingly distant place that is full of the unknown.
A recent survey by the Employee Benefit Research Institute found that fewer than half of workers older than 45 are confident they have enough savings for retirement. However, the large chunk of money that many people receive with their tax returns can be utilized to build a plan for the future.
Tax return time can be an opportunity for financial advisors to give clients a push in the right direction, to see the cash as a monopoly advantage, like passing Go and collecting $200. They can be propelled forward and make wise investments that will earn interest, save on taxes and reserve money for retirement.
Today's Tax Returns
In 2013 (2012 tax year), the average tax refund was a little more than $2,800. For some, this equals a whole month's worth of extra paychecks.
So where does this money typically go?
Often, money is divided among vacations, technology, shopping sprees and paying down a few larger bills -- basically using the money for wants and short-term needs. TurboTax reports that only 17 percent of customers used their tax refunds for investments in 2013.
Instead of quickly disposing of this income, it's time for consumers to start shifting the present mindset toward future goals.
Help Clients Figure Out Where To Start
Advise clients to start thinking like an investor. As they adopt an attitude of using finances to prepare for the future, give them a starting point. It's good to begin with an achievable goal, like starting an emergency fund, and then move to a long-term goal with retirement plans.
People who are new to saving can follow the lead of seasoned investors, who create a well-developed portfolio that diversifies funds into different accounts. Take $1,000 of the tax refund, and use it for emergencies, which will enable consumers to handle unforeseen costs. Then, invest the remainder of the refund for retirement.
Financial experts recommend taking advantage of employer-match 401(k)s and IRAs to begin. The idea is to earn interest and receive tax benefits. If retirement is a long way off, investors may want to take on risk in stocks and mutual funds.
As new investors practice the habit of saving over time, they will have a larger sum to put toward long-term retirement income, like a deferred annuity, which can supplement Social Security and pension plans.
Guiding people to invest when it means taking away from their paychecks is a large task that may require serious cutbacks and building new habits. However, teaching clients to save by starting with a tax refund can put them on track to a stable financial future.
Alanna Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for Annuity.org, where her primary focus is personal wealth management.