By FPA member Tim Sobolewski, CFP®
Last Updated: March 26, 2012
Our financial needs and concerns vary according to our stages and circumstances of life, more so than they do with simple chronological age. What we traditionally expect to happen to us at various ages may be far removed from our reality: someone in their 20s may already be burdened with heavy family responsibilities; a 60-year-old might be back in school; an 80-year-old might find her son and his family living with her once again. This month we will discuss financial planning issues that relate to these stages in our lives, no matter what age they occur.
For students and other young people without children, it makes sense to begin a program of disciplined saving and investing both inside and outside of their retirement plans. I recently spoke with a 26-year-old man, who together with his fiancée, managed to save $100,000 by diligent effort — unusual, to say the least, but a great example of discipline and focus. They plan to use this fund to support themselves should they choose to change careers or go back to school. Most of this money is not in their retirement plans, where it would likely be subject to early withdrawal penalties, but is in taxable accounts and readily accessible without tax penalties. At all ages it is critical to have funds available for emergencies, and to have them invested with high liquidity and without significant risk of loss. With this job market, a reserve fund that can cover six months of expenses would not be excessive.
Besides building up emergency funds, people starting out in their careers should also take advantage of the retirement plans that are available, and contribute what they can reasonably afford. No one, however, should live like a pauper and plow every spare dollar into retirement accounts; you need to live your life.
An estate plan should be started as soon as you reach the age of majority, and then updated throughout your life.1 This should include at least the basic legal documents: a will, living will, health care proxy, and durable power of attorney.
When people reach the householder stage, whether they've had children by birth or acquired them through marriage, they need to plan for their family responsibilities and then begin to plan for retirement. Many people are waiting to have children until their careers are well underway, so it is not uncommon to see new parents in their 40s. This delay in childrearing will put more financial pressure on parents who no longer have 30 years to save for retirement, and need to worry about paying tuition when they may have hoped to be retired.
Life insurance and disability income insurance are both critical for families, especially for single parents; you should obtain a professional needs analysis from a CERTIFIED FINANCIAL PLANNER™ professional, and then get competitive quotes for whatever coverage is needed. Too often people are 'sold' insurance, rather than just acting responsibly to obtain what they really need.
It is critical at any stage of life to prepare a budget and stick to it; you should include debt repayment (after calculating the best strategy) in that budget. Debt management is unfortunately often an issue for people with growing families and financial needs. Saving for college is a concern, but one that can be overplayed by advisers looking to sell (potentially worthwhile) 529 plans, or annuities that they claim will “hide” assets. Don’t over commit to college savings at the expense of funding your own retirement; less expensive state schools and scholarships can help with what can otherwise look like an insurmountable financial challenge. I remember a client who had saved a small fortune for his son's college, only to watch him end up in a state school after flunking out of Cal Tech after all the money was gone.
What to save for first?
Throughout the working years, and especially during the years when earnings are highest (typically in their 40s and 50s), everyone with a 401(k) plan should contribute enough to get the maximum match from their employer, rather than leave 'free' money on the table. Retirement planning should also include Roth IRAs when possible.
As people reach middle age, they begin thinking more about retirement. This is when the 'sandwich generation' feels most squeezed, between caring for their children and their own elderly parents, with financial and time pressures at both ends. If there's any interruption of income, this squeeze makes saving for retirement much more difficult. Job loss or career changes can mean that retirement funds need to be liquidated to provide for living expenses.
When you reach your 60s hopefully your children are out of the house and self-sufficient — but not always! Adult children often find themselves forced to live at home, with unemployment for recent college grads at more than 50 percent. Medical issues can begin to get worse, and long-term care is an increasing concern. Unless they have a pension, too often people find that they have not been able to save enough in their IRAs and 401(k)s to afford the retirement lifestyle that they would prefer. They may need to keep working longer than they would like, or retire with a more modest lifestyle than they would have hoped. Longer lifespans can exacerbate this problem. If people retire before they're eligible for Medicare, health insurance can be a significant expense.
At all life stages you need to pay attention to risk of principal loss and liquidity needs. Always be careful before investing in annuities, structured CDs and notes, life insurance as an “investment”, and non-traded REITs; you could find yourself unable to access your hard-earned savings without facing surrender charges, deferred sales charges and tax penalties. As always, seek the advice of a CERTIFIED FINANCIAL PLANNER™ professional to help guide you.
FPA member Tim Sobolewski, CFP®, is President of The Financial Planning Center, Amherst, N.Y.