As I approach the age of 50, I am starting to think and see things in a different light. To do this properly, you need to know where you have been, understand any mistakes you might have made and where it is you need to be going towards the next four or five decades. This is not just about you; however, it is about you and your immediate family. So let us look at how we can go about improving our financial well being.
If you have children or even grandchildren, you may be thinking of the costs to provide them a college education. One of the best means by which to save for education expenses is in a state-sponsored 529 savings plan. These plans are sponsored by just about all of the states, and you are free to invest in any program regardless of where you live and where the program is administered. Not all plans are created equally, and some offer better investment choices, and others offer funds with lower fees. You will have to decide what is most important to you and your family’s needs. Also, in some states, there are tax advantages associated with investing in your own state’s 529 plan, so there is that to consider as well. Save what you are able for your children or grandchildren but not at the expense of your own retirement.
So you have saved what you could for education now make sure you are indeed saving enough for your retirement as there is no one else you can rely on to fund this part of your life. If possible, max out your 401(k) plan at work if you have one and your IRA as well. If you are younger and saving for retirement, I strongly recommend you try to invest in ROTH accounts. That is because you will be in a lower tax bracket as you start your career and this will allow a ROTH account four or five decades to grow tax-deferred and best of all the proceeds will thereby be tax-free when you take the money out. Then as you begin to make more later in your career, you can shift to Traditional accounts and take the tax breaks now while you are in a higher tax bracket. But it is wise to have a combination of the two accounts to allow you a mixture of taxable and tax-free funds in your retirement.
This next one sounds easy, but that is not always the case. And that is to spend less than you earn and you will be able to avoid debt and save for such things as education and your retirement. This is why it is extremely important to have a budget in place so you know where your money is going and how you can shift expenses to start paying down debt or save for any occasion.
As you get older or start a family, it is important to be able to manage risks in your life. These can take many forms, but some of the more common are as follows. Life insurance to provide funds in the event of your death, so your family is not left totally without the means to take care of themselves. And life insurance is just as important for a non-working spouse as they provide a valuable service to your family despite the fact they may not bring in a paycheck. Remember, it is about managing risk. And since we are on the topic of insurance, it is a good idea to have an additional liability umbrella policy to protect you from any number of potential liability lawsuits that could arise. Long-term care is an insurance that is becoming more important with each passing year. Most people do not take out these policies when they are young, and the premiums are considerably lower than they are later in life. I have the opinion that if you know the premiums when you are younger and have the discipline to save your monthly premiums I recommend investing in a low-cost index fund such as the S&P 500. If you get this type of insurance later in life, I would opt for the actual insurance instead of self-insuring as a younger person could. But almost half of Americans will need some sort of long-term care in their lives.
And if you do have accounts with various types of assets, it is important that you manage your asset allocation properly. As time goes by and one asset type outperforms another your allocation will become distorted and will require a rebalancing. I do mine on an annual basis or when the allocation gets over 5% outside of my target goals. Sometimes this is best left to a professional as they can execute your plan without any emotion that you may experience if you were to have to do this.
A final area that many people need to consider but do not is final execution documents such as wills and powers of attorney. Always update your will whenever you have a life-changing event occur such as marriage, divorce or the birth of a child. Power of Attorney is important because not everyone will be able to make decisions for themselves and if you provide someone a POA, they may act on your behalf. That is also similar to providing someone a healthcare proxy to state what your wishes are in the event you are unable to do so.
While these items are all easy to do and in many instances, do not take long to establish they are extremely important and no one should delay in getting them into place.
If you have any questions about these or any other matter, please feel free to contact me directly or leave a message here.
