Tag: Decision Making

This is the third in a five-part series on financial decisions to make in different decades of your adult life. The first blog post addressed the issues most relevant to those in their 20s and the second blog post discussed topics relevant to those in their 30s. Now we move on to the subjects that are likely pertinent to adults between the ages of 40 and 49.

As we noted previously, these blog posts are intended to help you achieve a secure long-term future. One of the keys to achieving that is to invest as early as possible and adapt the habits that will maximize your chances of reaching your goals. For that reason, we “front-loaded” the suggestions we think are worthwhile in both your 20s and 30s. Ideally, you have done so. But be sure that you have by reviewing those two blogs first.

In your 40s, unless you have a career change or go through a divorce, it’s a matter of refining your efforts, so this post will be focused on the more tactical moves you can make.

Max Out Your Retirement Plans

At this point, you’re likely doing well enough in your occupation that you have more than enough to cover your costs of living and providing for your family. If so, be certain you are maximizing your contributions to your retirement plans. With a good 20 years or more of tax-free growth ahead, each dollar you put in can make a difference in what you’ll have once you are no longer working.

To add a small wrinkle of complexity, you may want to opt for a Roth IRA contribution rather than a tax-deferred option. As we said initially, the right financial move for you may differ from the assumptions we have made here about your career and personal circumstances. For instance, if your earnings in one year are lower than they normally are – beginning your own business, for example – you may want to pay taxes on the retirement contribution now rather than when you withdraw the funds when you probably will be in a higher income bracket.

Take Advantage of Health Savings Accounts

Another government-created vehicle that has tax advantages is one that often is overlooked: the health savings account (HSA). While it primarily is intended to help Americans cover medical expenses, it has three notable tax benefits: 1) contributions can be made tax-free, as with an IRA or 401(k) account 2) investments grow without incurring taxes on earnings and 3) withdrawals for qualified medical expenses also avoid taxes. Once you reach age 65, you can withdraw the money for non-medical reasons without a penalty fee, although you do have to pay an ordinary income tax on such withdrawals.

Ensure Your Portfolio and Risk Tolerance Still Match Your Goals

You may have heavily weighted your portfolio toward stocks when you were younger and benefited from their growth. Are you still willing to assume the risk they represent, compared to safer investments such as bonds? If you have ideas about an early retirement, now might be the time to move into investments that have less potential for loss than equities do. If you don’t expect to stop working anytime soon, you’ll likely want to stay invested in stocks.

Of course, this is highly individual, depending on each person’s circumstances and goals. But no matter what your situation, you’ll want to avoid a lopsided investment portfolio that could keep you from achieving the financial stability you seek. For instance, if you’ve concentrated funds in your company’s stock and benefited from its growth, now may be a time to sell off some of those shares and diversify into other holdings.

This blog post and accompanying video will explain more about stock options and how they fit into your overall investment plan:

Stock Options: Valuable, But More Complex Than You Might Think

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

This is the second in a five-part series on financial decisions to make in different decades of your adult life. The first blog addressed the issues most relevant to those in their 20s. Now we move on to the subjects that are likely pertinent to adults between the ages of 30 and 39. If you missed the first post, we recommend you review it first to understand our assumptions and be sure you’ve taken action on the items we mentioned there.

As we noted previously, these blog posts are intended to help you achieve a secure long-term future. We don’t think good financial planning means not having any fun. That’s important throughout your life. But you do want to achieve a balance, particularly in your 30s when life is likely getting more complicated. Here are some suggestions on making the right moves during this decade.

Buy Term Life Insurance

Life insurance is not an investment, and we don’t recommend buying any insurance products that describe themselves as such. Term life insurance is intended only to provide cash if you or your spouse dies. As such, it should only be designed to protect the survivors from large liabilities – current and future – such as mortgage payments, existing college loan repayments, or future college expenditures. It is not to serve as a complete income replacement for the deceased contributions. Rather, it allows the surviving spouse to take some time off and not have to rush to go back to work. You can keep the term life insurance payments lower by not over insuring and acquiring it when you’re young.

Watch this video for a short explanation of life insurance:

Save For Retirement Before Saving For Your Children’s College Educations

As was the case with the retirement vs. college debt issue we described in the first blog, saving for retirement takes priority, but for different reasons. Once you retire, you won’t be able to borrow money to cover your expenses. (Yes, reverse mortgages are an option, but not one we recommend.) Conversely, student loans and scholarships are available that can help mitigate the cash outlay for college tuition and housing.

Think of this as a variation of the airlines’ advice to put your own oxygen mask on first, then your children’s. You don’t want to set up a situation in which you reach retirement age and become a financial burden for your children. Set aside enough money to allow each of you to achieve financial independence.

Here is more on why we recommend prioritizing retirement savings over college savings:

Consider Setting Up a 529 Account and Funding It Early

If your budget allows, consider funding both your retirement account and a 529 educational plan for your children. Both of these investments grow tax-free, and the earlier you fund them the larger they’ll be when it’s time to use them. Ideally you would have enough money to put a lump sum in the 529 plan soon after your child’s birth. If not, allocating a smaller amount at regular intervals – the dollar-cost averaging principle – is a wise approach. Also, don’t be afraid to be aggressive with your 529 investments in the early stages because you’ll have time to take on the greater risk they represent.

This video breaks down the advantages of a 529 and why we think they’re a good idea:

Examine Your Housing Costs and Consider Buying a Home

Mortgage rates and housing prices have changed rapidly recently, with significant variations in markets depending on your location. As such, you may be more nervous about purchasing a home now than a couple of years ago. But rents have increased, too, so you may want to pencil out the monthly costs of renting vs. owning and see if now is the right time to buy your own home. Mortgage payments still are tax-deductible, which is a significant advantage in terms of reducing overall costs.

A few caveats: Don’t buy if you’re uncertain about staying in your current area for more than a couple of years. The costs of closing can wipe out the savings you gain. Also, don’t buy a home as an investment vehicle primarily. Rather, think of it as a better use of money you would otherwise need to use to keep a roof over your head. And finally, don’t buy a house beyond what you can afford with the thought of its growing in appreciation. Many people made that mistake during the housing bubble of 2007-08. When the bubble burst, their homes were worth less than what they paid for them, leaving them “upside down” in their mortgage payments.

Set Up A Will and Consider a Trust

It may seem premature in your 30s to think about your estate, but if you have children, it may make a difference to their futures if you’re suddenly not around. A will determines who receives your assets, but without a trust, those assets may not be put to use as you would have preferred. An 18-year-old potentially could receive his entire inheritance all at once and not have the maturity to handle it wisely. A trust could parcel out the amounts he would receive at different ages and what it can be used for to minimize the risk of wasteful spending. Additionally, you would help your survivors avoid a lot of potential stress and acrimony by naming your children’s guardians and backup guardians in the will rather than having them sort it out after your passing.

This video lays out the elements of estate planning, but as mentioned, you should contact an attorney for advice tailored to your circumstances:

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

Achieving financial security takes discipline, knowledge, and actions appropriate for your age. To help you do so, we’re introducing a five-part series of blog posts specific for each decade of adulthood: 20s, 30s, 40s, 50s, and 60+. We’ll give you concrete suggestions on what matters most in each age category and link to videos or other blogs for more detail.

Everyone will have different considerations based on these circumstances. This is therefore an approximation based on what has been relevant for most of our clients in different age brackets. Readers should adjust the recommendations to their own lives as pertinent.

The principles of financial planning – making time an ally, living within your means, sticking with a process to evaluate your plan– apply to everyone. But the best time to embrace these principles and act upon them is as soon as you can. In your 20s, you’ll want to develop the good habits and frame of mind that will set you up for a secure financial future.

Save For Retirement First, Pay Off Student Loans Second

At many points in your financial journey, you’ll need to pick one course of action over the other – even if they both seem worthwhile. The first decision you’re likely to face comes once you’re earning enough to more than cover your living expenses.

If you borrowed a significant amount to attend college, you may wonder which comes first: paying off the debt or putting money into your retirement plan. Most likely, saving for retirement is the better option. Student loans typically are set at low interest rates, and you can generate a better return with a retirement account. Even if the rates were equal, you come out ahead by reducing your taxable earnings.

If your employer makes a matching contribution, that’s even more incentive. Take advantage of the compounding interest rate that time provides you at this early age and you’ll be well-prepared for retirement decades from now. And if you have the option, consider putting money in a Roth IRA or Roth 401(k). Your tax rate now is likely to be less than it will be when you retire, so better to pay taxes now than 40 years from now.

One caution: Get advice on the type of investments that are best for you at this age and realize you will likely need to adjust them in coming decades.

Take a look at this video on Lake Road Advisor’s core investment principles:

Establish An Emergency Fund

For many people fresh out of college, landing a job that lets them keep up with their expenses is a cause for celebration. The temptation is to go out and buy a lot of things you’d always wanted. The better move is to put aside a portion of your salary to build up an “emergency fund.” This is the money you’d rely upon should something unexpected occur. That job might disappear or you have an accident or illness that keeps you out of work for months.

On a more positive note, you might want the flexibility to change course – move to a different city, take a specialized training course to qualify for a better position, etc. The rule of thumb is to have three to six months of expenditures saved as part of that emergency fund. Throughout your working life, you’ll want such assurance that should something happen, you’ve got a financial cushion beneath you.

Learn more about emergency funds and tying your investments to your goals:

Be Careful With Credit Cards – Live Within Your Means

Taking out a credit card and paying it off on time each month gives future lenders the assurance that you’re a trustworthy borrower. That will qualify you for larger purchases, such as a mortgage. But be careful. It’s easy to get carried away and buy items that you don’t need or can’t afford when you have that piece of plastic in your wallet. Before you know it, you’ll find yourself struggling to pay off the monthly bill and chew up your income paying the high interest rates that credit cards carry.

You can avoid this by being mindful of your cash flow and living well within your means. In our experience, families that can save greater than 20 percent of their income and buy less than they can afford are the ones that enjoy the most financial success. That’s not to say you shouldn’t have fun in the meantime, but keep it all in balance.

This video explains the three buckets of a smart cash flow system that can help you achieve that balance:

Lake Road Advisors (LRA) is a virtual wealth management firm headquartered in Corning, New York, with offices in Ithaca, NY and Portland, OR, founded by Paul Sydlansky, CFP in 2016 to provide financial planning for busy mid-career professionals with young families. LRA partners with couples long-term to build financial plans that allow them to live the life they want while preparing for the future by making smart money moves to grow their wealth. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Portland, OR office at (607) 292-2172 or at the firm’s website at https://lakeroadadvisors.com/

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.