Young professionals have a lot on their minds these days. Perhaps furthest from mind is a retirement saving and investment plan, and maybe even further – estate planning. However, the earlier you start saving, investing, and planning, the better.
Setting money aside for the future can be easier said than done. After considering your rent or mortgage, student loan payments, other expenses, and trying to have just a bit of fun, the thought of investing and planning for retirement can seem ominous. On top of all those factors, COVID-19 and the associated global recession have added much economic uncertainty.
Fear not, though – it’s not that bad! Here are a few basic principles to get you started:
Become A Disciplined Saver
The optimal savings rate to meet retirement needs is often 15% or more of gross income. That may not be practical for you just yet, but the important point is to make savings a priority as soon as possible. Compounding interest and time are your friends. The key is to begin saving at a consistent rate within your budget and to increase that savings rate when you can.
One of the best ways to stick with your savings plan is to develop automated savings strategies, such as having contributions made directly to your 401(k) or your investment account. Many 401(k)’s offer an automatic increase feature to bump your deferral up 1% each year so you don’t feel the increase as much. On this note, we normally recommend contributing a percentage to your 401(k) rather than a dollar amount. This way your contributions increase along with your pay raises – when undoubtedly your lifestyle and retirement income needs increase as well.
Max the Match
Maybe the number one guideline in 401(k) investing is to max the match. Many employers offer a matching formula by which, for example, they might match 50% of your contribution up to 6%. That’s free money! All you must do is save 6% of your pay towards your own retirement (which you should be doing anyway!), and your employer will give you another 3% of your pay towards your retirement.
Due to the pandemic, many companies suspended or reduced their 401(k) matching contributions to save cash and avoid layoffs. Although such a move slows one’s accumulation of retirement funds, the bigger long-term damage is done when an employee stops contributing to the 401(k) if the employer stops matching.
Diversify Savings And Investments
It is important to remember that life happens…and often before we reach age 59½. Qualified retirement accounts such as your 401(k) are functionally locked away until you attain the age 59½, so that money may not be available in the event a cash need arises. So, before you get excited about being able to max out your 401(k), consider diversifying your investment vehicles and saving some of those funds in a retail investment account or an individual Roth IRA.
Roth contributions are made after tax and allow tax-free growth and withdrawals in retirement. They also typically allow penalty-free withdrawals up to the amount contributed. This provides some liquidity as well as an excellent tax benefit for accounts that appreciate substantially.
Having a growth mindset is central to building a good retirement plan while young. With many years until retirement, a young investor’s accounts should be weighted toward stocks, with enough diversification to protect against poor-performing stocks or industries. You should remember that success in the stock market comes over the long haul and you likely have time to ride out cycles and downturns. With a long time horizon and relatively low income in comparison to your later career earnings, young investors are in a unique position to realize the benefits of these vehicles.
Have Honest Conversations and Make a Plan
Begin early with efforts to identify your values and develop associated goals for your life. This can be an even more important conversation when a spouse or prospective spouse comes into the picture. How will you view and handle money? Will you pay for your children’s education? Do you want children? Is travel and recreation of great importance to you, or would you rather spend those resources on a larger home? Why are those different goals important to you?
These are just a few examples of topics that often arise in our card game exercise called Honest Conversations®. This engaging activity is an invaluable way to explore and identify values, to develop goals, and to begin a solid plan to provide guidance and a lens through which to view decisions as they are faced in the future. Having that solid plan in place can also provide more confidence in your investment allocation, incentive to maintain or increase your savings rate, and peace of mind as you move forward towards accomplishing those set goals.
Estate Planning – Not Just for the Old and Wealthy
Estate planning may sound like an intimidating term that does not apply to you, but there are basic applications that you (along with everyone else) should consider:
- Durable Power of Attorney for Healthcare – As an adult your parents no longer have the legal right to access your medical information or to make decisions on your behalf. Having a simple document drafted ahead of time to allow your parents, your spouse, or another individual to assist in these matters can provide for a smoother experience should injury or illness occur.
- General Durable Power of Attorney – Similar to the healthcare document referenced above, you should consider this document to allow your appointee to handle your financial and business affairs on your behalf in the event you become incapacitated. If this gives you pause, the document can be drafted as a “springing” document that will spring into action at the time of your incapacity.
- Advance Directive for Healthcare – Often thought of as its predecessor, the “living will”, this document allows you to make selections as to your preferences for your treatment in the event of either a terminal illness or permanent unconsciousness. You will be able to choose if or when you would like food, water, life support, etc., and you will have the ability to name a Proxy.
- Last Will and Testament – As you begin to establish yourself financially, you will likely own a home, vehicles, and other assets. A basic will can direct where those assets flow at your death, as well as name who will handle your affairs for you.
- Asset Titles and Beneficiary Designations – It is important to note that your will only directs assets as a last resort. Account titles and beneficiary designations will override any language in your will. A house held in Joint Tenants with Rights of Survivorship will flow to the other tenant. A 401(k) account with a listed beneficiary will flow to that beneficiary – even if you are estranged from that person and “meant” to change it. Make sure to periodically review your documents! We recommend an estate review every three to five years, or more often as needed.
Make it a Great Start
There are no do-overs in life. You cannot replace the power of starting young with a disciplined savings and investment strategy, a long-range plan for life and retirement, and attention to the important not-so-fun legal considerations along the way. Our goal is to help you identify and live your One Best Financial Life®, and that is even more valuable and rewarding when you get a head start.
If you would like to learn more about CapSouth Wealth Management please visit our website at www.CapSouthWM.com or if you would like to have a conversation to discuss this article further, I’d love to chat. (678) 272.7555
by: CapSouth Wealth Advisor, Scott Fain, CFP®
www.capsouthwm.com/our-team/scott-fain/
CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.
