Milestones in Focus - "The Plan & Test Phase" / Late 30's-40's

April 01, 2021


Our Financial Planning Timeline covers how to set up the right foundations for your financial future, this quarter we review some of life’s milestones that occur as investors transition from their 30’s to their 40’s. 

Avoiding Lifestyle Inflation

As incomes increase and household net worth grows, many couples begin to acquire nicer vehicles, possessions, eat out more often with friends, etc. is is a critical time to prioritize what you want most in life over what you want now; self-discipline is key so that discretionary expenses do not spiral ever upward. Manage credit card debt and limit high interest loans; try as best you can to “pay as you go” and avoid  unnecessary debt for consumer purchases. 

Retirement Funding

Aim to keep your regular savings growing as your pay increases, and “pay yourself first”. Strive to defer the highest percentage of your overall salary that your household budget can bear each year. Pre-tax contributions to a 401(k) or 403(b) are set aside before they hit your bank account and are a great start towards building financial security. In addition to retirement plan contributions through your employer, make Regular IRA contributions to minimize your annual tax bill and increase overall retirement savings. Roth IRA contributions, while not tax deductible, make sense when your current income level falls into a lower tax bracket. A regular savings program that starts at an earlier age is the number one factor that determines how well-funded your retirement will be.

Estate Planning

Preparing a Will acts as a good rst step so that a person’s wishes are known upon their passing. In certain states, such as California, probate can be especially challenging and time-consuming, so Living Trusts are recommended for households with an estate above $250,000, especially if you own real property. In addition, Living Trusts offer privacy, since probate is a public process. Not all households need a Living Trust, such as those that rent or jointly own a home (with right of survivorship) or whose financial assets consist of a pension, retirement accounts and/or life insurance policies, which transfer to the named beneficiary. In addition to Wills and Trusts, Powers of Attorney are important legal documents to consider if a spouse or loved one is incapacitated due to illness or accident, as well as an Advanced Medical Directives. Check with your estate planning attorney or let us know if you need a recommendation for qualified counsel.

529 Funding

Saving for college is a common worry for most parents. Annual contribution limits apply to 529 college savings plans and while contributions are not tax deductible, the earnings inside such plans grow tax deferred. If distributions are used for schooling related expenses, they will qualify as tax free distributions. Keep in mind, recent expansion in the tax code permits qualified distributions for K-12 schooling, vocational and trade schools, apprenticeship programs, and paying down excess student loans upon graduation. These changes offer a less-restrictive pathway for funding educational pursuits. California and many other states apply lifetime contribution limits on a per beneficiary basis, generally over $250,000.

Rightsizing Insurance

In conjunction with contingency planning, reviewing personal and property insurance policies periodically can make a world of difference. We often see gaps or deficiencies in clients’ insurance plans, and frequently recommend professional review of all coverages. The financial ramification of being underinsured poses a far greater risk than the additional costs associated with the rightsizing of coverages. For example, as a home’s value increases, the insurance coverage should increase to insure proper replacement coverage. Adding an umbrella policy to cover any unforeseen shortfalls in homeowners, auto, or watercraft coverages is also generally a good idea.

Bringing It Home

As financial assets and complexity grows, the number of accounts and the challenge of managing things can make financial planning a more pressing need. Obtaining a “financial checkup” with an objective professional can act as a litmus test to determine where you stand and if there are any critical missing pieces in your financial structure. As the Rolling Stones sang, “time is on my side, yes it is” and planning now around these milestones can really impact your future. As always, please let us know if we can help you or those you care about with any of these issues.