In our previous blog post, Audrey discussed the ideal timing for getting serious about retirement planning. The take-home message of that post was that retirement planning should begin early on in your adult life. The financial decisions that you make throughout your life have a profound impact on your retirement, so prudent planning early on makes for a greater chance of successfully accomplishing your goals later. The “right time” to start your financial planning is yesterday.
If you read that post and felt panicky, this post is for you. As ideal as it is to plan early, we realize that it’s uncommon for recent college grads to scout out financial advisors and dive into the retirement planning process right away. With so much going on in our early 20s, few of us have our attention on our eventual retirement, as much as we should. It’s far more common for people to seek out financial advisors when they “have to,” for instance when their financial situation becomes more complex than they can (or want to) handle on their own, or when they hit some level of invested assets that mandates professional management. This shift might happen later—for people in their 50s who have been saving for 20+ years and are now looking to buy a second home, for instance. Or it might happen early on.
In the Bay Area, many individuals see their financial situation become more complex in their 30s and even 20s when they land high-paying jobs at companies that offer stock options and other forms of incentive compensation. Additionally, the baby boomers are expected to transfer some $30 trillion in assets to their heirs over the next 30 to 40 years, which will add complexity and planning opportunities for generations X and Y.
People seek out financial advice and turn their attention to retirement planning at all different stages of life. No matter where you lie on the spectrum, and whether you’ve put much thought into retirement savings at this point, here are some of the ways you can pragmatically integrate financial planning into your lifestyle.
Early on in Your Career
It’s typical for people to spend more than they save at this stage. Making even a small shift in this dynamic is a good idea.
Creating and sticking to a budget may be the most impactful financial decision you can make at this point in life.
Prioritize the essential expenses like housing, healthcare, and any debt you may have accumulated up to this point. Avoid the urge to buy big-ticket “lifestyle” items until you’ve had some time to settle into your new life situation.
Build an emergency fund (cash, in a checking or savings account) to cover expenses in the event of a job change or other big move.
If at all possible, after that, start making regular (monthly) contributions to an employer-sponsored retirement plan (401k, SEP IRA, SIMPLE IRA, etc.).
Married with Children
This is a common point for people to shift their focus toward establishing long-term goals and managing risk.
Perhaps one of the most important steps for a married couple to take (and even more important when children are involved) is to establish an estate plan. A thoughtfully considered estate plan will not only direct your assets after death but also establish who will care for your children if neither spouse is able to and who will make financial or medical decisions for you in the event of incapacitation. It will also indicate your desires for end-of-life treatment.
The next step at this stage, if you haven’t already done it, is to develop a financial plan. A comprehensive financial plan should lay out your goals from now through retirement, and show you what you need to do to get there. It should also review and address your insurance needs.
40s and 50s
People often see their income max out around this time, so managing taxes frequently takes center stage. Make sure you are maximizing the use of available credits and deductions.
As assets continue to build up, it is important to keep a long-term perspective. Resist the urge to dip into savings for tempting—but costly—things like elaborate vacations and second homes.
Age 50 presents an opportunity to improve your situation in retirement by catching up on your retirement plan contributions. For example, once you hit age 50, you can add an additional $6,000 per year to a 401k or $1,000 per year to an IRA.
Retirement and Beyond
Upon entering retirement, first focus on enjoying the fruits of your labor. You made it! Congratulations! Next, be mindful of your cash flow and how large gifts or donations not previously planned for could affect your outlook going forward. A large part of a retiree’s income typically comes from invested assets, so managing the withdrawal rate from that portfolio is crucial to success.
Since benefits can begin as early as age 62 (although delaying to a later age increases your monthly benefit), Social Security and Medicare planning become an integral part of the planning process at this stage.
As children age and grandchildren arrive on the scene, it’s a good idea to revisit your estate plan to ensure that your wishes will be carried out. For those who have assets exceeding the federal gift and estate tax exemption ($5.49M per individual), updating the estate plan becomes increasingly important.
This list isn’t comprehensive and doesn’t apply universally to every situation. Ideally, professional financial planning begins early on in life and continues through retirement. As fiduciary advisors to individuals and families with different needs, Parkside Advisors uses a comprehensive approach to find solutions that are in our client’s best interests, in each phase of their lives.