Kevin Ward, Advisor
Life is full of unknowns—simultaneously a source of tremendous potential joy and anxiety. But with thoughtful planning, you can mitigate some of the unknowns—or at least better position yourself to handle surprises when they arise. In this series, we explore some planning you can undertake, depending on your phase of life. People admittedly do things in their own order—everyone’s on their own journey—so rather than group considerations into age brackets, we’ve grouped it relative to where you are with respect to your (or your significant other’s) career. If you happen to tackle life in a different order, first, good for you. And second, these pieces should offer some ideas for you to explore more on your own or alongside a seasoned financial advisor, so you can still position yourself well to handle whatever the future throws in your direction. Among the considerations we consistently explore are those related to benefits management, insurance, your balance sheet (managing liabilities, or debt, and assets), and saving for major life events or purchases.
With that, we look at some early career considerations in this inaugural piece. Many will be in their mid-to-late-20s, maybe their early 30s during this phase of life. Accordingly, some of the first orders of business involve getting yourself independently established:
- Starting your first post-college job
- Establishing your own household
- Working toward clearing yourself of debt
Suppose you’re embarking on a full-time job that offers benefits. In that case, some of the first decisions you’ll probably have to make will revolve around your benefits, including insurance (short- and long-term disability insurance, as well as, possibly, life insurance, depending on your employer’s benefits package) and maybe some retirement options. If you’re in your 20s, retirement can feel a long way off—and it likely is! But that doesn’t diminish the importance of making sound financial choices now. On the contrary, making savvy decisions early in your career will set you up for a successful and, hopefully, relatively joyful retirement down the road. Please do your due diligence when it comes to your options. What insurance options does your company offer? Health insurance is often standard at most full-time jobs now, but what about life insurance? Disability insurance? Though paying premiums for insurance may not seem worthwhile through young eyes, you never know what life could bring. Paying such premiums while you likely have relatively fewer expenses than you may in the future could make a lot of sense.
Similarly, the importance of contributing to a retirement account—whether a 401(k) or some other vehicle—early and often can hardly be overstated. Compounding is more than your friend—it’s a critical key to financial independence down the road. So, however much you may be tempted to spend your disposable income during your first several years of employment on your dream car, make sure you’re saving as much as you’re allowed in your retirement account—particularly if your employer offers some match of your savings, which could be thought of as the equivalent of a free raise.
Also, dig into the retirement account options and their tax ramifications. For example, does your employer offer a Roth 401(k)? A Roth is a post-tax vehicle, meaning you will pay income tax on any upfront contributions. But from there, those dollars will grow on a tax-deferred basis, and when you withdraw funds down the road (presumably once you reach retirement), you won’t have to pay income tax on qualified withdrawals. A Roth can be a powerful vehicle for compounding savings, particularly earlier in your career when your salary likely hasn’t grown tremendously, and you’re in a lower tax bracket. For those who are further along in their career, it might make more sense to defer paying income taxes until retirement, when your income might be lower again. Though it’s hard to determine which approach is optimal precisely, an educated assessment of when you’re likelier to be in a lower tax bracket can have a meaningful impact on your after-tax savings available for retirement.
Related to decisions about both insurance and retirement are decisions about your beneficiaries. Though you may not have dependents yet, it’s worth ensuring that should anything untimely happen to you, your family—parents, siblings, nieces, nephews, etc.—will receive access to any insurance or retirement savings you acquired. It’s always best to name beneficiaries simultaneously to open any eligible accounts—e.g., retirement, insurance, etc.
Similarly, it’s worth getting an early jump on estate planning. It might not seem important when you’re early in the stages of acquiring assets, but ensuring your assets are designated for your loved ones is important. It’s also worth thinking about who you’d like to handle your affairs, should you become incapacitated and incapable of making important financial or health decisions. Signing powers of attorney—whether related to health care, financial, or both matters—can bring some peace of mind that your affairs will be handled as you’d like. There are various types of powers of attorney—some convey broad powers over your affairs to an attorney-in-fact, while others are narrow. Powers of attorney can be established such that they only take effect under certain circumstances or for a certain period, and they can be designed to survive your incapacity to make your own decisions or not. Don’t get too lost in the weeds here: The main aim is to ensure your parents or other loved ones can access your financial records, accounts, and directions should anything unexpected happen. Importantly, remember that you can (and should) update your powers of attorney if you marry or start a family, so anything you establish early on can be amended.
As you become financially independent, you may also consider moving, particularly if you’re living with roommates or in your childhood home to save money. When thinking about establishing your own household, it’s important to budget for all the new expenses you’ll face—in addition to the obvious ones like rent (or a mortgage, if you’re able to buy), you will need homeowners’ or renters’ insurance, Internet, phone, cable, utilities (depending on which, if any, are paid by the landlord). It’s also worth considering how your other, maybe existing, expenses will be affected—e.g., will you spend more on gas because your commute to work is further? How will your grocery bill change? Are you going from a situation with four roommates to just one or two? Planning will help ensure you don’t feel too financially squeezed amid your increased independence.
Provided you’ve budgeted well; you may begin to experience one of the greatest of new freedoms: disposable income. As we alluded to earlier, the temptation to buy your dream car (or fill in the blank with whatever your dream “luxury” item is) as soon as you can afford it is undoubtedly strong. But in the long run, it would be wiser to make some forward-looking choices. For example, if you have debt from student loans, could you accelerate your payments to retire that debt sooner? Or is there a big-ticket item you know you’d like to purchase soon—a home, or maybe an engagement ring? Are children an imminent part of your future? The sooner you start saving for whatever may lie ahead, the sooner you can direct your disposable income to other things.
Addressing your personal financial hygiene and planning for the future early in your career will better equip you to handle life’s inevitable—and, hopefully, joyful—surprises. And even if they’re not joyful, it’s much better to face unanticipated events without the added anxiety of how they will impact your financial present and future.
In future pieces, we’ll look at other stages of life and career and will share some suggestions for how to continue your early momentum. If you have additional questions, please reach out to our team at breckenridgeteam@monetagroup.com.
© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information and opinions contained herein are subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
