As kids head back to school, adults spanning several generations set their sites on getting their financial house back in order. What are the most important financial planning considerations in three major demographics—Millennials, Generation X and Empty Nesters?
Millennials: First things first – Before making any big financial commitments, like buying a house, figure out what you want life to look like.
- Are you in a relationship and looking to “settle down,” or do you highly value freedom and flexibility? If the latter, you shouldn’t be buying a house or committing to a job that is geographically tethered.
- If you’re in your twenties, the primary factor that will influence your financial success is how well you establish yourself in a career. Invest in yourself, and that will likely help you invest more money in the future.
- Save as much as you can in tax-qualified retirement accounts at this phase of life, because once you get settled down and have kids, your expenses will rise dramatically.
- Don’t default to 100% equity portfolios just because you’re young. After getting burned by the market crash of 2008, many Millennials got scared away and didn’t benefit from the subsequent market rise. Your portfolio should likely be predominantly stocks at this age, but consider some fixed income exposure to keep from losing your shirt (and abandoning your strategy) in a downturn.
Generation X: If you fit the demographic stereotype, you’re now married with 2.5 kids and a yellow lab. There are very serious financial planning implications that come with these commitments.
- If you have minor children, the most – and I do mean the most – important financial planning recommendation I have for you is to create or update your will. Make sure that it specifies who your child’s guardian and trustee should be in the event of your death. Each adult member of your household should have a will, durable power of attorney and advance directives.
- Next up is life insurance. If there are people who rely on you financially—presumably a spouse and children—you likely need some life insurance. Don’t get fancy—10 to 15 times your income at a 20- to 30-year term will likely do the job. Nail down those estimates by reading this and then complete this exercise.
- It gets harder to save for retirement when you’re in your peak expense years, but even if you’re feeling the pinch, make sure to still take full advantage of the company match in your 401(k). It’s free money.
- Life is so busy, it often feels like you’re overwhelmed. But don’t forget to check your investment allocation, especially with the market again hitting new highs. Make sure your allocation suits your current station in life. If you have a well-conceived, diversified portfolio, rebalance if necessary. If you don’t, there’s no better time than the present.
Empty Nesters: Whew—you made it! The kids are, or soon will be, out of the house and, hopefully, out of college. (Or is that the other way around these days?) It’s time to make up for lost time now that your expenses have dropped and your income is peaking.
- Workers of any age are able to contribute $17,500 to a 401(k) or similar retirement plan—you ought to be maxing that out. But anyone who’s age 50 or older can contribute an additional $5,500,the catch-up contribution. Take full advantage.
- Similarly, workers of any age can contribute $5,500 to a Roth IRA if they fall under the income caps. If you’re over 50, you can contribute an additional $1,000. Take advantage of this opportunity to have a tax-free bucket in retirement.
- It’s also time to really hone your investment strategy. No more winging it! Consolidate old retirement plans into a single IRA and dedicate yourself to fine-tuning your allocation. Err on the side of conservatism now that you’re glimpsing retirement.
- Conduct an in-depth retirement analysis (like a Monte Carlo simulation) to determine if you’re actually on track for retirement.
- Get help if you need it from a financial advisor who’s made a fiduciary commitment requiring them to act only in your best interest.
These quick-hit bullets will apply to most, but everyone’s situation is unique. Make sure to explore any exceptions to these rules as they might pertain to your world.