Investment and FINANCE

Money Report

Generation to generation, in the financial world, there’s a time to reap and a time to sow.

Our financial activities, and the sphere within which we conduct them, are a potent way we touch and interact with the rest of the world. While a chronological survey can be simplistic, there are issues and strategies that persist throughout a lifetime, sharpening and fading from focus in different decades, as well as some financial concerns that are very specific to a particular period in life.

20’S AND 30’S
Saving early and consistently should be the mantra for these decades; for a home, cars, education, and retirement. If you contribute $4,000 a year into a retirement savings account at age 22, in 40 years at 8% your account will be worth a million dollars. However, if you put off savings for just 10 years, be prepared to more than double that annual contribution, to about $8,800 per year, to make your million. At this age it’s important to participate in your company’s 401(k) or 403(b) plan and contribute as much as you can, 10 to 15 percent of your salary if possible. Open a traditional or Roth IRA if you qualify. Remember, IRAs permit a penalty-free first time home buyers withdrawal, subject to certain conditions, so it can help with a home purchase, a typical concern for young people in this age group.

Learn the advantages that a long-term perspective gives an investor in the stock market. You’ve probably got more time than money at this stage, so consider riding out the ebb and flow of the market and invest a healthy proportion of your retirement funds in stocks or stock mutual funds, taking full advantage of their potential for growth. Remember to diversify, and avoid the lure of speculation.

articipate in your employer’s health insurance plan; if they don’t offer one, purchase some kind of coverage yourself. Consider a higher deductible policy with lower premiums, possibly in conjunction with a Health Savings Account. This is an underinsured age group and often totally exposed to the financial consequences of an unexpected illness or accident.

Establish an emergency fund with two to three months living expenses in a liquid account such as a money market fund or CD. This will keep you from having to fall back on credit cards and loans from 401(k)s when unexpected financial needs and emergencies arise.

Establish good credit early, don’t miss a payment, and keep your limits high and your balances low. Credit card interest is money lost and credit card spending gets the most well-intentioned folks into trouble. Marriage and children are more the norm in this age group, bringing extra income, extra expenses and the challenges of balancing two often very different attitudes toward money and spending. Increased income brings more responsibilities: mortgage, taxes, insurance, children’s education, leisure and travel. If you have lingering debt from your 20s, get rid of it now.

Proper insurance coverage becomes essential. You now have a home and automobiles; you need adequate homeowners and auto coverage, possibly flood insurance and various types of liability. Life insurance is an important tool at this time to assure a stable financial future for a surviving spouse and children. Don’t neglect disability insurance, which protects your family if injury or illness prevents you from earning a living. This is actually more likely in this age group than premature death, so this type of insurance ranks high in importance for this age group.

It’s time to begin saving for your children’s education, if you haven’t already started. Evaluate your state’s pre-paid tuition plan, if you already know which state schools your kids will attend. Review your state’s 529 plan, which will permit state tax free, as well as the federal tax free withdrawals, if used for allowable educational expenses. You can use any 529 plan to pay for schooling in any state, although you will forgo the state tax benefits. Look for low plan and fund expenses and diversified fund choices and try to avoid plans with sales charges and fees.

40’S AND 50’S
By the time you’ve reached your fourth and fifth decades of life, you’re secure in your life’s direction and you’ve formed a strong personal and professional network. You expect life to become easier but new challenges appear on the horizon.

Financial demands are heaviest during these decades. Children are enrolled or soon to be enrolled in college and tuition is higher every year. College savings programs such as South Carolina pre-paid tuition assistance ( and 529 plans ( can help with college costs if saving is started early. Paying directly out of the checking account while not “planned ahead money” has advantages in that it doesn’t count when the “family contribution” is calculated for the college financial aid package. Plus, the expenditure falls as peak earning years are reached. Other last minute solutions include home equity loans, student loans, and as a last resort, retirement savings.

Life insurance is still necessary to insure the earning power that pays the mortgage, family living expenses, college tuition and everything else. The premiums are still affordable, but emerging health issues may make it irreplaceable. If rates are not locked in on a term or whole life policy, your age can cause the premium cost to rise out of reach. Long term care insurance is often low on the to-do list for this age group, but this is by far the best time to buy. Make the strength and stability of the insurer a primary qualification, not price.

For many, these are “sandwich years.” Retirement savings get squeezed in between responsibility for medical or financial care of parents and costs of raising a family. Make an effort to involve all siblings; unless you are an only child, in the responsibility for an aging parent. There are resources available to help senior citizens with medical expenses and those should be explored before depleting savings. The AARP Web site offers helpful suggestions to lower medical and prescription drug costs. Reverse mortgages and spending down assets can help conserve a parents assets; however, the rules are complex and an attorney should be consulted to avoid mistakes. Your investment mix should still be primarily growth oriented; since peak earning years are approaching, contributions should be serious. This is the age when plans for a retirement lifestyle begin to emerge. These plans must be funded or they’ll never happen. Unless you retire early, don’t take money from your IRA, 401k or 403b prior to age 59 ½, or you’ll pay a 10 percent penalty and income tax as well. More important, you will lose the compounded growth over time that money can create. Look to balance your investment allocation among stocks, bonds, and cash in a way consistent with your tolerance for risk and need for growth.

60’S AND 70’S.
You are retired or nearing retirement and may need to make decisions regarding benefits packages, pension payouts, company provided life insurance and healthcare benefits. Strong relationships with investment and financial advisors are often formed in this period, since many of these decisions are complex and cannot be changed. You may have adult children with financial issues of their own, and they may need help. Young grandchildren are likely, and it’s an ideal time to establish and help fund 529 plans with their parents. You may have the ability to increase your gifting, both to family members and charities. Consider funding an IRA or Roth IRA for a working child, rather than a cash gift. Or consider funding a family vacation, rather than a cash gift. Remember, when making charitable donations, you can use appreciated stock and avoid capital gains tax.

Income issues are now primary and portfolios need to be adjusted. You will probably depend on a combination of Social Security, investment income and possibly a pension. If investments are to provide a significant proportion of income, asset allocation and a coherent investment strategy are of paramount importance – now is the time to have an income projection done. If the future seems uncertain, there are many things you can do to avoid or mitigate a shortfall. It’s a lot more enjoyable to start a second career early in retirement to provide a more secure future than to wait until later on in retirement and find out you need to work to make ends meet.

If you’re over 59 ½, you’re free to withdraw from IRAs and some sheltered plans without penalty; you just have to pay the tax. Have a professional review required withdrawal rules beginning the year you are 70 ½. A mistake on required distributions can cause a headache and a 50% penalty. Be sure to account for any after tax contributions to your IRA.

Now may be the time to learn more about bonds, as you value stability and income along with growth. Consider government and corporate bonds for all accounts and tax-free municipal bonds for non-retirement accounts only. Evaluate no-load bond funds that can provide diversification and reliable income. As with any fund purchase, read the prospectus and be aware of charges and fees, they vary tremendously and have a significant effect on your ultimate returns.

Put your estate in order. Men’s mortality rates increase dramatically in these years, while many women become widows. Many will remarry, and many will inherit significant wealth and the responsibility of managing it for themselves and their families. Yo u might still have the will you wrote when your children were young. Go to an attorney who specializes in estate planning and have wills, powers of attorney and health care documents drawn up. If you are subject to estate taxes, the attorney may suggest a system of trusts that will enable you and your spouse to benefit from the full estate tax exemption.

Simplicity is very important. Estate planning should be done by now, and gifting programs in place. Highly appreciated assets can be gifted to a charitable trust and provide a lifetime income, as well as an attractive tax deduction. Medical care is a priority; liquidity should be maintained for co-pays, deductibles etc. You should have a realistic plan for continuing care. You may already have found and settled into an assisted living community by now. When evaluating an adult continuing care residence, be sure to analyze the differing payment options offered. Many require a larger one-time payment or smaller periodic payments; some offer a limited period where your investment can be returned. Financial decisions may be harder to make in these years, due to declining facility and lack of interest. Be sure a family member or friend who has your trust is available to provide help in bill paying and financial matters, or make use of a reputable bill paying service. Yo u might consider home health care for several hours a day or several days each week, if needed. Check out specialized agencies that provide this type of care. Consider a prepaid burial plan.

Consider your grandchildren, who now may be the 20 or 30-somethings we began with. Use your assets and your experience to guide them, or help their parents guide them, so they can have the best financial future possible. Your experience, if it has brought you wisdom, is a more valuable legacy than any money you may leave them, and it’s a legacy that any of us can give regardless of the wealth we have accumulated.

Steven Weber, Gigi Harris, and Elizabeth Loda, CFP, are advisors and staff of The Bedminster Group. The Bedminster Group provides fee-only investment, estate and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the authors and do not necessarily reflect those from any other source. Mutual funds are offered by prospectus only and discussion of investments should not be taken as a recommendation to buy or sell any investment.