If you had a timeline of the financial steps you should probably take
in life, what would it look like? Answers
to that question will vary, but certain times of life do call for certain
financial moves. Some should be made out of caution, others out of opportunity.
What might you want to do in your
twenties? First and foremost, you
should start saving for retirement – preferably using tax-advantaged retirement
accounts that let you direct money into equities. Through equity investing,
your money may grow and compound profoundly with time – and you have time on
your side.
As a hypothetical example, suppose you are 25 and direct $5,000
annually for 10 years into a retirement account earning a consistent 7%. You
stop contributing to the account at age 35 – in fact, you never contribute a
dollar to it again. Under such conditions, that $50,000 you have directed into
that account over ten years grows to $562,683 by the time you are age 65 with
no further action from you. If you contribute $5,000 annually to the account
for 40 years starting at 25, you end up with $1,068,048 at 65.1
Aside from equity investment, you will
want to try and build your savings – an emergency fund equal to six months of
salary. That may seem unnecessarily large, or just too grand a goal, but it is
worth pursuing, particularly if you are married or a parent. You could suffer a
disability – not necessarily a permanent one, but an illness or injury that
might prevent you from earning income. About 25% of people will contend with
such an episode during their working lives, the Council for Disability Awareness
notes, and less than 5% of disabling illnesses and accidents are job-related,
so workers’ comp will not cover them. As Money
notes, just 13% of millennials have disability insurance.2,3
What moves make sense in your thirties? You may have married and started a family at this
point, so your spending has probably increased quite a bit from when you were
single. As you save and invest in pursuit of long-range financial objectives,
remember also to play a little defense.
You should think about creating a will and
a financial power of attorney in case something unforeseen happens. Another
estate planning/asset protection move that becomes essential at this point is
life insurance. Right now a 20-year, $250,000 term life policy for a 35-year-old
can cost less than $30 a month. It will not build cash value like a permanent
life policy, but it can easily be renewed (and in some cases, converted into
permanent life insurance).4
What
considerations emerge between 40 and 50? This is where you may be “sandwiched” between
taking care of your kids and your elderly parents or relatives. Your spending
may reach a new peak; hopefully, your salary is rising as well.
Try to maintain your retirement planning
effort in the face of these financial stresses – your pace and level of
retirement account contributions. You may have teens or pre-teens at home, and
if you have not yet considered creating a college fund that can grow and
compound over time, now is the right time. You should not dip into your retirement
fund to pay for their college educations, no matter how onerous college loans
may seem.
You may want to look into long term care
insurance. If you are wealthy, or soon will be, it may not be worth buying; you
may have the money on hand to pay for years of nursing home care (or other
forms of eldercare) that might be needed as you age. If you find yourself in
the middle class, LTC insurance may be worth the expense depending on your
health history and health outlook. Buying it before age 50 and while you are in
good health is a wise move, if you are interested in such coverage.
Between 50
and 60, you are in the “red zone” before retirement. If you can, accelerate
your retirement saving through greater contribution levels and/or the catch-up
contributions allowed for many retirement accounts after age 50. You may want
to tolerate less risk in your portfolio as retirement nears; you may not. Some
investment professionals contend that in this era of low interest rates and low
inflation, it makes much more sense to tilt a portfolio toward equities than
toward fixed-income investments – provided you can put up with the inevitable
volatility. Other investment professionals feel that is simply too risky a
decision, even with some boomers needing much larger retirement nest eggs.
If possible, think about (and plan for) an
approximate retirement date. Aim to reduce your debt as much as possible by
that time or earlier. Retiring with multiple major debts can be stressful to
say the least. Lastly, check in with a financial professional to gauge how
close you are to realizing your long-term financial objectives.
This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. This information has been derived from sources believed to be
accurate. Please note - investing involves risk, and past performance is no
guarantee of future results. The publisher is not engaged in rendering legal,
accounting or other professional services. If assistance is needed, the reader
is advised to engage the services of a competent professional. This information
should not be construed as investment, tax or legal advice and may not be relied
on for the purpose of avoiding any Federal tax penalty. This is neither a
solicitation nor recommendation to purchase or sell any investment or insurance
product or service, and should not be relied upon as such. All indices are
unmanaged and are not illustrative of any particular investment.
12292015-WR-1493
Citations.
1 - businessinsider.com/compound-interest-and-retirement-savings-2015-3
[3/12/15]
2 - disabilitycanhappen.org/chances_disability/disability_stats.asp
[7/3/13]
3 - time.com/money/3178364/millennials-insurance-why-resist-coverage/
[8/27/14]
4 - valuepenguin.com/average-cost-life-insurance
[12/23/15]