Financial Planning Timeline: Milestones in Focus

October 01, 2020

As a firm, we would like to introduce a new section to our newsletter that will cover financial planning milestones throughout each phase of an individual’s life. Topics include savings vehicles, contribution and distribution schedules, tax deductions and credits, benefit optimization, and retirement.

Financial planning is an exercise in both commitment and awareness. As the adage says, “proper planning and practice prevents poor performance”. Whether these plan- ning topics are an ongoing refresher course, a resource to share with your kids/grandkids, or a first-time passthrough, we plan to explore these topics in the next few newsletters.

Like the shifting phases of life which provided the solution to the Riddle of the Sphinx,

we find that most households tend to shift across four financial planning phases of life. The first of these phases could be generally described as “Building Your Wealth”. It is easy to ignore these issues and post- pone decisions. By working closely with an experienced financial advisor, it is often much easier to start off on the right foot.

“Building Your Wealth” 20’s-30’s

Saving: It is often stated that starting to save early makes a difference, both in discipline and outcome. For example, if $100 were to be saved every month over a 40-year career, with a 6% annual return, it would result in a retirement account totaling over $200,000. Whereas, if savings were to commence 10 years later at that same $100 per month, after a 30-year career it would result in $100,000, a 50% difference. In the investing world time is your ally!

Those early in their career will need to be familiar with the different types of savings accounts and their inherent benefits:

Retirement (Tax-Deferred)

Accountholders are encouraged to delay withdrawals from these accounts until they reach retirement age, using a combination of tax deferrals and early withdrawal penalties. Due to the longer time horizon, risk tolerance is often higher than personal/taxable accounts. In general, taxes on capital gains and other income (interest, dividends) are deferred until funds are withdrawn from account. These tax advantages are considerable and investors are encouraged to take advantage of them – we especially favor the “ROTH” type plans now available.

401(K)Plan: company-sponsored retirement account into which employees can contribute pre-tax monies considered a “traditional” plan. Employers may also make contributions, often a 1:1 match up to a certain level. Many plans also offer a “ROTH” 401(K) type plan, funded with after-tax contributions, but earnings come out tax-free.

ROTH IRA: an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Earnings and capital gains do not count towards income. After five years, withdrawals of principal or earnings are also tax-free.

403(b) & 457 Plans: in general, retirement plans for certain employees of public schools and tax-exempt organizations. Participants include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.

Pensions: employer-sponsored retirement plan where employers make contributions to a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, with the result generally a monthly income upon retirement. The employer assumes responsibility for this benefit, including any investment risk.

Personal Accounts (Taxable)

• Personal or jointly owned accounts outside of retirement accounts that are funded with post-tax savings. Ordinary income or capital gains will be taxed as they are realized. Investments in these accounts can be cash or investment selections and can be structured for short, mid or long-term financial goals.

Securing: As personal balance sheets grow, certain debts may also be taken on. Structured repayment schedules on student loans, personal assets, or mortgage debt can burden a loved one in the unfortunate event of a premature passing. Purchasing appropriate life insurance is crucial when a premature passing could financially handicap or bankrupt a surviving spouse or household. There are many different vehicles of life insurance; to determine the underlying amount of insurance needed, consult your advisor.

As your family becomes established, college savings will become imperative. The costs of college are rising at a rapid pace, saving in a tax-advantaged 529 account offers market performance without the taxable consequences. If distributions are qualified expenses for schooling, both the original principal and gains will be tax free. With the passage of the Tax Cuts and Jobs Act in 2017, 529 plans expanded their coverage to K-12 private schooling expenses (annual distribution limit of $10,000 per beneficiary). Keep in mind that annual contribution limits exist and that K-12 expenses could deplete the funds of 529 plan significantly before college age years.

Structuring: While in the “Building Your Wealth” stage, the proper budget and savings habits will pay dividends in the near feature. We live in an age of instant gratification, and purchases are always just one click away. By setting up the proper budget, monthly expenses are forecasted, discretionary cash is predetermined, and savings goals are met. Budgeting takes discipline and compromise to meet long term goals.

We gladly work with the kids and grandkids of our valued clients. If you or your family have any questions about financial planning, please reach out and schedule a time to talk with us.