The various stages and milestones of life—from starting a first job to eyeing retirement—pose different financial challenges at each phase.
The concerns of a 20-something who might be struggling with student loan debt and new house payments are different from those of the older worker who may have social security questions and aging parents to help.
But experts ranging from financial planners to estate attorneys to CPAs say four letters will help ease the fiscal journey for travelers at any chapter of life: P-L-A-N.
“Start now,” says Robert A. Bonfiglio, CEO of Rise Private Wealth Management, a practice of Ameriprise Financial Services, with offices in Bedford, Berlin and Littleton. “Wherever you are, you should start now.”
The elements of that planning, of course, depend on the stage of life.
Experts agree that this is the time to establish financial habits that will serve the client the rest of their life, beginning with living within their means.
“It sounds simple, but it might not be for someone in their early 20s coming out of college and making more money than they’ve ever known,” says Bonfiglio.
He says this is an ideal time to start saving, noting that most young people working for private companies will never see a pension. He recommends setting aside 20 percent of income—some for short-term cash reserves, some for long-term goals like retirement, and some for midterm objectives like buying a house. That cash reserve should be three to six months of living expenses, he says.
Some advisors suggest even more. Diane DeStefano, senior financial advisor at Ledyard Financial Advisors in Concord, recommends six to eight months’ worth of savings for living expenses to avoid the strain she saw some workers experience during long periods of unemployment in the recession of 2008.
“Saving is really key,” she says. “Credit is great, but cash is king.” She notes that many apps—like Mint, Daily Budget and Clarity Money—are available to help track cash flow.
Automating one’s savings, so direct deposits are made from a checking to a savings account every payday, is another way of saving painlessly, DeStefano says.
Experts also recommend taking advantage of the “free money” available through employers that match 401(k) contributions.
Twenty-somethings should also consider Roth IRAs, according to Bonfiglio. Unlike contributions to traditional IRAs, which are taxable when the money is withdrawn, Roth IRA contributions are taxable now, but the amount is far less compared to the taxes one would pay later when the IRA has grown in value, he says.
And if someone is drowning in student debt or credit card debt or other obligations? Attack it incrementally, says Bonfiglio. Start by paying 5 percent monthly and increase it by 1 percent every six months, he advises. Start with obligations that have the highest interest rate and, once those are paid off, take the money that was going toward them and add to the payments on the next obligation so the debt resolution “snowballs.”
Those in their 20s who have more complicated financial situations, like investment properties or stock options at work, might also want to speak to a certified public accountant (CPA) “to help you navigate the tax side of your new assets,” says CPA Jim Roberge of Karr & Boucher in Manchester.
As for buying a home, Roberge points out that one should never purchase a major asset for the tax advantage. “You can afford the house or you can’t,” he says. Certain retirement accounts allow distributions without penalties for first-time home purchases, he notes, but that should be weighed against the loss of retirement income later in life.
Bonfiglio also says 20-somethings should avoid many of the common financial pitfalls he sees in their age group, including failing to understand all the benefits available to them at work. Money put into health savings accounts, for example, is pretax and tax-free when used for qualifying medical expenses, yet many people are unaware of those advantages. Also, one should not assume that disability or group life insurance offered through work is the least expensive plan available, he says.
Those in their 30s typically have new challenges and priorities, often involving the arrival of children, and Bonfiglio recommends establishing goals and setting up a budget that prioritizes saving.
Among the goals 30-somethings might consider is establishing a college savings account for their children. Whether paying the full freight for a child’s education or expecting them to share in the expense, a chat with a financial advisor might clarify goals and strategies, says Bonfiglio.
It’s also a good time to start educating children about finances by providing allowances and discussing how much money should go toward spending, saving and charity, he says.
Especially with children in the picture, the 30s are a good time to consider life, disability and long-term care insurance, he adds.
Though most people don’t consider estate planning until later in life, those in their 30s might do well to consult with an attorney if they have a child or other loved one who is disabled and likely to outlive them, according to Marla Matthews, a partner in the Concord firm of Myskowski & Matthews.
“It’s about coming up with an estate plan for the kids if something should happen to the parents,” she explains. Stand-alone trusts, which do not involve probate, or trusts within a will, with a judge providing a second set of eyes on how finances are managed, are among the options, depending on client preference.
If the child in question is expected to need public benefits in the future, she says, “there is some estate planning that can happen to make sure they can continue to get their public benefits even if they get a share of someone’s estate.”
DeStefano further recommends making sure that all the beneficiary designations on your retirement accounts and insurance policies are up to date.
And if it hasn’t already been done, the 30s is a good time to establish a relationship with a CPA, who can help as tax returns get more complicated, says Roberge.
Professional advice might help avoid a common pitfall Bonfiglio sees in some people at this stage of life—failure to adjust one’s portfolio. “Any money you need in the next two or three years for living or educating your kids or buying a home should not be exposed to the stock market,” he says. “The last thing you want to do is pull money out when the stock market is down.”
As people head into their maximum earning years, financial planning becomes “a prioritization game,” says Bonfiglio.
Children who may still be in college, looming retirement years and aging parents may be in the mix, and Bonfiglio recommends speaking to a financial advisor to help decide how much money should go to each priority.
He also suggests imagining what an ideal day in retirement would look like. “That gets people thinking not just about the financial aspect, but about having a sense of purpose and fulfillment in retirement,” he says.
The death of a parent or the admission of one to a nursing home can also stir 40-somethings to consider what they should do to make it easier for family members upon their own deaths, says Matthews.
Consulting with an attorney who focuses on estate planning not only helps to address that issue but also how assets should be distributed upon death and whether medical and financial powers of attorney should be established. Estate planning is “a very individual process,” she says. “There’s no right or wrong.”
The 40s are also a good time to take a hard look at one’s retirement accounts, says Roberge. “Part of that is understanding the tax ramifications,” he says. “Just as you need to be well diversified in your investments, you also need to be so with your retirement accounts, with Roths, tax-deferred and hopefully have a little bit of additional savings. … People might be throwing too much into tax-deferred.”
And folks should be prepared for an emergency, advises Bonfiglio. “People get divorced, kids move back into the home. You always have to have cash reserves, and you have to expect the unexpected,” he says. “Don’t rely on every last dime for your living expenses.”
With the idea of retirement becoming really real, now is the time to fine-tune what the true cost of living is, says Bonfiglio.
“If you want to maintain the same standard of living, let’s document that standard of living so you know what your essential bills are—the light bill, property taxes, groceries—and what are your lifestyle expenses like hobbies, eating out, travel,” he explains. “What do those add up to so we can make sure you have the right pile of money when you retire that you won’t outlive.”
If one is thinking of retiring early, it is important to think twice unless health care is covered, he says. Medicare does not typically start until age 65, and private insurance is a significant cost, he adds.
“The biggest expense for retirees is their health care costs, between premiums, copays and emergencies,” Bonfiglio adds.
“For a healthy retired couple, it can be north of $250,000 over the course of their retirement.”
These preretirement years are also the time to examine things like investment properties one may not want to keep, says Roberge. “It’s not all about accumulating anymore,” he says of this stage of life. “It’s about adding to your existing funds and making sure you’re paying the least amount of taxes on that.”
A professional can help decide things like when the most advantageous time is to dispose of a rental property, he adds.
It’s a huge change going from employer or self-employment income to social security and retirement income, says Roberge.
“This is an important time to talk to a financial advisor and tax advisor about what’s the best way to pull that money out. … Your social security can be taxable up to 85 percent, depending on how much income you have,” he says.
Roberge recommends having a team composed of a CPA and a financial advisor because “there are things I understand that financial advisors don’t, and vice-versa.” A financial team could “model a scenario so we know how much to withhold from IRA distributions,” he says. “Because you don’t have an employer withholding taxes on a W-2 anymore, you have to figure out that withholding. That’s where that communication is most important.”
An estate planning attorney can provide another layer of assistance. Matthews says the 60s are the time to solidify that estate plan and share it with one’s family.
“A good estate plan can help avoid litigation in the future, especially where there might be some tension between siblings or other family members,” she says. “I advise clients to share their wishes with their families in any case where you think there might be a question or a conflict. It’s better to share while you’re still here.”
And if one is retired and finds that they are not making ends meet? “You have to adjust your lifestyle, or you get a job in retirement,” says DeStefano. In addition to bringing in more income, “a lot of seniors do that today for enrichment,” she says.
At any stage, she adds, success depends on “just being mindful of how you spend [and invest] your money.”