In her 1976 classic “Passages,” Gail Sheehy presented a road map to adult life, tracking the changes we experience and the challenges we face in our 20s, 30s, 40s and beyond. A similar road map exists for financial planning.
The fundamentals of managing money are constant, according to Matt Tylus, a Salem-based financial advisor with Ameriprise Financial Services: Create a realistic budget and live by it; pay down debt (highest interest first); pay yourself (save); and adapt your investment strategy to your stage in life, starting as early as you can.
The 20s: Save and Pay Debt
“For people just getting started in their career, or just getting out of college, the most important thing I can say first off is to get started with some kind of long-term savings plan, no matter how small a contribution you can make,” says Tylus. “Whether it’s a company-sponsored 401K or a Roth IRA.”
The challenge for young adults to saving is the conflicting demand of paying off new debt, mostly in the form of student loans and, in some cases, credit cards or car payments. A good budget should accommodate living expenses, including minimum payments on all monthly debt, while also setting aside some cash for principal reduction on the highest interest debt and some savings.
Whatever amount is available for debt reduction should first go to credit card debt, then car loans and finally, the lower interest student loans. “That’s essentially how I’ve attacked my debt and how we tell a lot of our clients to attack their debts,” says Tylus.
While paying down debt is essential in your 20s, so is saving to take advantage of compounding [interest] as well as time being on your side. “Basically, you’re young enough to be as aggressive as possible in your investments because you can afford the massive market swings we see and weather the storms,” says Tylus.
Smart budgeting is key. Start with an accurate assessment of income after taxes and deduct all essential living expenses. If that leaves no money left for savings or principal debt reduction, it’s time to find a way to reduce expenses.
“You’d be surprised how many things we spend money on three or four times a week that are not essential,” says Tylus.
“When I got out of college, I wanted to buy a car, but the numbers just didn’t add up. A lot of our 20-year-olds live with mom and dad for a few years to get on their feet. If parents are willing to keep you in the home, attack that debt.”
The 30s: Building a Household
Many of the same strategies in the 20s are carried over to the next decade. “Hopefully at this point you’ve paid down the majority of debt and have transferred some of those payments to savings,” says Tylus. “This is the time when many people start a family and make the biggest investment they’ll ever make in a home purchase.”
Insurance becomes an important part of financial planning at this point, as does education planning for children. “This is the time when you need the most life insurance you can afford,” says Tylus. “Term life insurance policies with death benefits of $500,000 all the way up to $1 million are fairly cheap in your 20s and 30s.” A good approach is to find a fixed-rate, 10-year term policy that you can renew each decade into your 50s and 60s or convert to a whole life or universal life policy as you age.
As soon as the kids come along, explore 529 College Investing plans. Although contributions are not deductible, earnings are tax-free and will not be taxed when the money is taken out to pay for college.
The 40s: Taking Stock of Retirement
“The 40s is when you really need to start considering, what does my retirement look like?” says Tylus. “Financial planning is the key to that. Look at all your assets, everything you’re doing and ask yourself: what does a dream retirement look like, what is the minimum tolerable retirement and where is the middle ground?”
Don’t fall into the trap of having all your retirement savings in pre-tax buckets like 401Ks. “If you put all your savings into those buckets, by the time you’re at retirement, you’ll pay 22% of every dollar you take out in taxes,” said Tylus. “This is the time to start investing in a diversified portfolio through a guided brokerage account with money that has already been taxed.”
This is when people start their peak earning years and should be diverting as much of that increase as possible to savings.
If you own a home by this time, you should explore refinancing every time mortgage rates drop low enough to lower monthly payments, says Tylus, or every time your credit score improves. “If you have a 30-year mortgage, try to refinance that on shorter terms, like 15 years.”
Closing costs are not a big concern in the refinance market these days, according to Tylus. “It has a lot to do with the health of consumer balance sheets,” he says. “COVID has really changed perspectives on savings and created massive savings in the household. We’ve seen consumer balance sheets healthier than ever at this point.”
Government stimulus checks, extended unemployment benefits, a hot job market, working from home and driving less have helped improve savings for millions of households.
The 50s: Time to Play it Safe
“At this point, if you haven’t consulted a financial adviser, you should definitely do so by now, to see what retirement looks like,” says Tylus.
“This is when you need to take a hard look at your portfolio risk and start dial-ing that way down. Maybe now we go from aggressive to moderate risk, and we should probably start looking at estate planning, trusts, medical directives and powers of attorney.”
This is also the time to investigate long-term care insurance because it’s only going to get more expensive every year past 50. Residency in a skilled nursing home now costs as much as $10,000 a month, and the alternatives for those who need such care are not attractive: an unwieldy burden on family or the county nursing home on Medicaid.
According to Fidelity Investments, you should have saved at least six times your annual salary by age 50 to retire comfortably at age 67, the age at which people born after 1960 are eligible to receive full Social Security benefits.
This is also a good time to set up your online Social Security account if you haven’t already done so.
The 60s: Social Security Strategies
“Congratulations. You made it this far,” says Tylus. “Now we need to start talking about Social Security strategies, when is the best time to start taking it.” Every year you wait past eligibility adds another 8% to the annual amount, until age 70.
“We also need to talk about Medicare, health care costs, and what that’s going to look like,” says Tylus. His firm, like many others, offers seminars to explain the Medicare landscape and various options for Medicare Supplement or Advantage plans.
“On top of that, we need to start talking about distribution strategies for the money you have saved, in terms of what’s most tax-efficient and how to stretch the money as far as possible. It depends on each situation because there is no cookie-cutter solution,” he says.
Retirement income was once characterized as a three-legged stool: Social Security, personal savings and defined benefit pensions. “In today’s world, pensions are going by the wayside,” says Tylus. “Where pensions do exist, we’re seeing a lot of companies buy out the participants and close them down. Nowadays it’s one-third Social Security and two-thirds personal retirement assets.”
One way to create your own three-legged stool is to buy an annuity with a portion of your retirement savings to guarantee a certain monthly income for life, or for a certain number of years. Annuities come in many shapes and sizes, so trusted financial advice is essential for such a consequential decision.
“COVID has forced a lot of people to take a step back and consider their mortality for perhaps the first time in their life,” says Tylus. “Our business has been insanely busy because a lot of people have been forced to think about the future, their family, and taking care of their health, but also their financial health as well.”