THE FINANCIAL COLUMN: Young Money

By The Editors

As you make it, what do you do with it?

In an effort to create engaging content on financial issues that are relevant to you, our engaged reader, we have reached out to some experts. The kind of experts who live in Western North Carolina, and understand the people in their communities. Especially the kind of experts who know how to explain things in a way that can be understood by the rest of us. In this first article (of hopefully many), we ask a few questions that are of particular interest to our younger audience. If you are just starting out in your professional life, if you might be considering yourself an “adult” in the near future, if you are a Lil Wayne fan and wonder what the title of this article was doing in such a sophisticated magazine, then read on. The intelligent responses we received and printed below might come in useful one day soon.

Capital at Play: How do I know if I need a financial advisor, how do I find the right type of advisor to match my income, and what pre-existing conditions would make hiring a financial advisor essential?

Laura: A financial advisor may not necessarily be “essential” for some people, but financial advisors can definitely help you plan for a more secure financial future or specific financial goals you might have. The more complex your life/financial situation, the more the need for an advisor increases. Receiving an inheritance, sale or control change of a business, or even a 401(k) rollover could also increase your need.

Dawn: Check online for questions to ask when hiring a financial advisor, and ask your friends and family for references. Read about the advisors’ areas of focus and expertise. Next, call them and get a feel for how their practices work and whether your situation would be a good fit for their methodology. Finally, interview a few in person to find the best match. A good financial advisor will be like part of your family for potentially many years to come, so you want one that you actually enjoy being around and feel comfortable talking to.

Harli: Everyone needs financial planning, and anyone with long-term investments needs an investment manager. A financial advisor will often serve in both these roles. You know you need to hire a financial advisor if you lack one of the three major requirements to do it yourself: 1) Have the knowledge necessary to do your own financial planning and investment management; 2) Have the time necessary to commit to doing it well; and 3) Have the desire to do it. Many wealth management firms will bundle financial planning and investment management together for one fee. These firms will often have minimum asset requirements. Each firm is different – a visit to their website or a call to the company should tell you what their minimums are.

What can my tax return teach me about my spending habits, and in which areas do people typically overspend?

Laura: Unfortunately for most Americans, tax returns tell little about spending habits. However, tax returns can show us opportunities to reduce our current taxes through tax deferred contributions to 401(k) and deductible IRA accounts.
dawn: I would instead suggest you engage in a spending study. Start keeping merciless track of all the money you spend. Whether with an online program, a spreadsheet, or just a notepad and pencil, you can tally up and discover where you are spending your money each month. Pay especially close attention to cash spending, as it is easy to find money “leaks” when it comes to cash. In most cases, we find that people overspend on food and entertainment.

What are the best ways to be saving at the age of 30? 40? 50?

Travis: Statistically, a worker will need to save 15% of their pre-tax income for over 35 years in order to be able to fully replace their salary in retirement without running the risk of spending their accounts down. In your 30s, generally most younger investors are dealing with debt from school or from starting out in a new career. While it would be ideal to save 15% of your earnings into a retirement account, many times this is too difficult and must be made up for with higher savings levels later. By fully taking advantage of potential matching contributions at work, you could earn an immediate 100% rate of return by deferring some of your salary into a retirement plan. This would be much more strategic than paying down student debt that may be at 6% or 7% interest rate. You can also set a savings goal in this timeframe to eliminate credit card debt that may be at higher interest rates of up to 19%.

Once you enter your 40s and are ideally past some of your debt reduction, it would be ideal to further increase your retirement savings. 401k plans for 2016 allow for a $18,000 annual contribution, and depending on your income you could be eligible for a post-tax Roth IRA contributions outside of work for $5,500 per year.

Once you approach your 50s, it is normally time to play catch up on your retirement savings. The IRS allows for higher retirement contributions for persons above age 50, allowing $18,000 plus a $6,000 “catch up” contribution to employer 401k accounts. IRA contributions are also increased to $6,500 from $5,500.

What percentage of my annual income should I divert to savings or investments?

Dawn: I don’t find there to be a perfect set percentage that is appropriate for everyone. The flip answer I would give would be, “As much as possible.” If saving is difficult for your budget, then start small. Set aside 1% regularly and automatically. As soon as that becomes painless, ratchet it up to 2%. And so on. Aiming for 5-10% would be an excellent initial goal.

Ashley: This isn’t necessarily a “one size fits all” approach. If you are younger, you have more time to accumulate, and can likely save a lower percentage of your income. If you are just beginning to save at 45 or 50, you will need to divert a much larger percentage of your income to retire at a reasonable age. Most people recommend that you save 20% of your income each year. This could be hard for a 25-year-old, in their first job, making very little money. My recommendation would be to start with 10% and then increase that by 1% each year. A good rule of thumb is that you can spend approximately 4% of your investable assets in retirement. Simple math: If you believe you will spend $40,000 in retirement (including taxes) then you would need $1,000,000 saved at retirement. You’d then calculate how much you’d need to save each year to reach that goal.

Laura: An exact percentage is difficult to pin down because every individual is different. If you save too little or not at all, you might have to work longer than planned or cut back on your spending during retirement. Obviously, the more you save and the sooner you start saving, the better off you’ll be approaching retirement. The power of compounding (earnings you gain on previous earnings received) is a powerful tool that you should be taking advantage of with your savings. Don’t think that you are too old to contribute to an IRA. You may be able to take advantage of tax savings in traditional IRAs until you’re 70 ½ years old.

We plan to have a baby next year. What are some ways to prepare now?

Chad: If you are working, the first thing you should do is review your maternity/paternity leave policy. If you have not already set up an emergency reserve fund, this should move up high on the priority list, especially if maternity/paternity leave is without pay. With the rising cost of child care, does it make sense for one parent to stay at home? Parents-to-be should review all their insurance documents (i.e. health, life, disability). Also, the last thing new parents want to think about is who would become the baby’s guardian if something were to happen to them.

Dawn: Preparing for a baby can be exciting and stressful. From a financial perspective, I would suggest doing lots of homework on the gear and supplies you might need. Speaking from experience, it is super easy to overspend on your baby-to-be, and partly this is because it is just so much fun to buy things for baby! Many items you will need can be easily found second-hand. Remember, “less is more.”

Laura: One of the best ways to mentally prepare to be parents is to realize that children are not cheap. Once you get over the initial shock of how much raising a child costs (close to $245,000 to age 18), there are ways to save money for you and your new bundle of joy. 1) Do your research—you don’t need every baby product; 2) Buy in bulk; and 3) Shop for value.

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What are my best current strategies, including a realistic age, for establishing a college fund for my child?

Dawn: Maximize your retirement saving opportunities first. Retirement accounts are invisible, in a sense, when it comes to qualifying for financial aid. So take care of building your own nest egg before saving for college. Remember that you can borrow to put your child through college, but you can’t borrow to put yourself through retirement.

Daniel: Time value of money is an incredible savings tool. Let’s say that you decide to wait until age 10 to begin a college fund. Did you realize that at a 7% annualized return, you will need to contribute twice as much to the college fund in order to be in the same place? For this reason, contributing early and often will keep your overall out of pocket contribution as small as possible.

Laura: The two tax-friendly strategies for college funding are Coverdell accounts and Section 529 Plans. Without going into too much detail, both plans allow for after-tax contributions and, if used on qualified educational expenses, the funds come out tax free. The earlier you start saving, the less stress you will have as your child approaches college age.

What should same-sex couples know about investing together, insurance beneficiary naming, and state/federal tax filings?

Dawn: This depends entirely on whether or not the couple is legally married. Things are generally harder to screw up in your planning if you are married, whereas if you are domestic partners, more thoughtful planning is required. For partners, I would suggest getting legal counsel and the help of a knowledgeable financial planner to avoid possible catastrophes. State laws are not going to be friendly in the event you are not married. It doesn’t matter if you have been partners for 30 years—if you don’t have good legal documents, your family, not your partner, will make decisions for you if you are incapacitated, and the family will inherit the assets, not your partner.

Laura: It would be wise for the couple (any couple, really) to consider the titling of their accounts. Titling and beneficiary naming are decisions that need to be made by each couple that will help decide what will happen to each individual’s assets or share of account if they were to pass away. Now that same-sex marriage is legal, same-sex couples that are married can file a joint return. This is usually the preferred filing status of most married couples as it tends to be the most tax favorable.

Rick: Same sex partnerships have many of the same types of legal issues as opposite sex partnerships. For example, the beneficiary form that is used on most wills and retirement accounts (401(k), 403(b), Roth, Regular IRA, annuities) is the same and can be used outside of probate to convey assets to those that we love. Most of the gray area is in health, disability, Medicaid, and long-term care insurance. These plans are typically governed with state-by-state differences. Also, each state and/or insurance company uses different definitions for same sex relationships. Thus, an independent review of the policy language is required.

Are there any recent changes in regulations that a young person (<45) should note or
think about?

Laura: With regards to the Affordable Care Act, you might owe money to the government if you received financial subsidy for healthcare insurance bought through the marketplace. Financial aid is based on your estimated annual income, and if your actual earnings were higher than anticipated, the government could require a refund.

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