The beginning of the year is a great time to set financial goals, take stock and make adjustments. Financial planning issues, however, can vary according to age. The Boston Globe recently published "Financial planning for the ages," which has a generation-by-generation financial planning guide for different stages of life and the transitions faced along the way.
When it comes to financial planning, millennials — who are now 20-35 years old — have time on their side. Establishing good financial habits can pay big dividends in the future. Take a close look at cash flow. Paychecks have to cover rent, food, utilities, transportation, student loan debt, and other essentials, so figure out if you have enough for the basics before you buy another $7 mocha latte.
Most millennials have school loans, which can reach $300,000 or more for medical school, but there are repayment options related to income. Build an emergency fund to cover three months of living expenses and take advantage of employer matched contributions for your 401(k). Contribute enough to get that employer match, and then start increasing your contributions at a half a percentage point each year. When it comes to investing, one thought is the target-date mutual fund, which automatically resets the mix of stocks, bonds, and cash equivalents in its portfolio based on a selected time frame.
Gen Xers are navigating a financial world filled with competing demands. These folks are now ages 36 to 51 and have typically worked for a decade or more. There's been time to establish an emergency fund, save for retirement and build a career. But their lives may also include a spouse, children, and a home, which means juggling expenses like mortgage payments, child care and college savings. Add to this the need to be available for aging parents or the complexity of divorce.
Insurance and estate planning have taken on greater importance, and retirement is no longer so far away. Cash flow again is important, so take a close look at where you're spending your money. The emergency fund should cover six months of living expenses and should be all cash: you'll need that money to be easily accessible if you are laid off.
Insurance is critical, so get enough life insurance to cover the mortgage, day-to-day living expenses, and future schooling costs should a spouse pass away. Also, estate planning means not only having a basic will but also making certain you have a health care proxy, powers of attorney, and guardianship for your children.
With retirement beginning to loom, many Gen Xers have to choose between funding 401(k)s and IRAs or putting money aside for the children's college education, but your retirement savings needs to come first. Plan on at least 15% of income to be set aside for retirement—25% would be better.
Boomers are being segmented into two different groups – the older boomers, who are in their late 60s, and younger boomers, who are in their mid-50s. Many older boomers have already made key retirement decisions about work and Social Security, and they're now working on figuring out the impact those choices are having on their lifestyle.
To set goals, boomers need to look at life expectancy and balance that against expected cash flow, then choose a lifestyle that fits. As far as cash flow, current salary is the starting point, but include projected monthly Social Security checks, pension payouts and required annual distributions from retirement accounts. Then calculate estimated annual expenses based on your current lifestyle.
Increased longevity is one reason that people wait until 70 to take Social Security. You can claim benefits at 62, but you only get 75% of the benefits that would be available at full retirement age (i.e., age 66 for boomers born before 1955, gradually increasing to 67 for those born in 1964 or later). Wait until age 70 to take benefits, and you'll get up to 32% more.
Expenses will probably change in retirement, but they can be hard to predict. Projections should include tax calculations, changes in insurance needs, and the likelihood of higher health care costs. Navigating the complexities of Medicare coverage can be challenging, requiring homework.
Taxes are also a critical planning element, such as for funds withdrawn from traditional IRAs. This could mean a significant tax bill once required annual minimum distributions from these accounts start at age 70 ½. These distributions will also impact the taxes owed on Social Security payments. Also, look at long-term care insurance to hedge against the cost of future health issues that might require a nursing home or special home care.
Estate planning might include charitable contributions or your wishes about how personal possessions are divided. Finally, your investment portfolio will need some tinkering. Boomers also need some stock investments, although this depends on age and health.
Reference: Boston Globe (January 10, 2016) "Financial planning for the ages"