Financial Advice For Any Stage of Life

Smith Wealth Advisory Group is Here to Help with Your Wealth and Living a Fuller Life

It’s never too late to get your finances in order, and the team at Smith Wealth Advisory Group has some advice to get you started and keep you on track. Regardless of your life stage, below are a few tips to consider.

L to R: Alyssum M. Keefer, Vice President/Wealth Management, Branch Manager; Kevin J. Smith, Executive Vice President/Wealth Management; Tyler L. Lerman, Financial Advisor

Photo Credit: Smith Wealth Advisory Group

1. Building a Foundation.

Arguably the most crucial stage, developing good habits and avoiding bad ones is critical to a sound financial future.

Start an emergency fund.

An emergency reserve of 3-6 months of living expenses is generally recommended to prepare for unforeseen events (i.e. home or car repair, medical expense, loss of income, etc.) which can be costly and unpredictable. Earmarking several months of living expenses into a savings reserve can provide protection from these situations by giving you access to monies that are readily available on short notice.

Pay yourself first.

The first monthly bill to be paid should be to yourself for the betterment of your financial future. It’s common for investors to get this backwards and attempt to save whatever monies may remain at the end of each month after expenses are paid. Inevitably, little typically remains after all the bills are paid so nothing gets saved. Start by routinely putting away at least 10% of your income regardless of the specific dollar amount. With time and compounding, it’s amazing what even small ongoing investment contributions can do over time.

Capitalize on tax-advantaged retirement accounts.

Many employers offer retirement plans (401k, 403b, 457b, SIMPLE IRA, etc.) that enable employees to contribute a portion of their pay in a tax advantaged manner. Many employers will also match employee contributions up to a certain percentage. Be sure to capitalize upon any “free money” available through such employer matching contributions. Additionally, establishing a Roth IRA may be wise early in one’s career. After-tax monies are contributed to the Roth account initially, with all future investment growth and subsequent withdrawals tax-free assuming the account has been opened at least 5 years and the owner is age 59 ½ or older. The IRS limits who can contribute based upon income and also limits the dollar amount that can be contributed each year ($6,000 in 2021, plus an additional $1,000 if age 50+). Thus, it’s important to consider a Roth earlier in one’s career while income is lower and generally still within applicable limits.

Focus on debt reduction.

Many investors focus primarily on increasing assets but lose sight of the other side of the balance sheet - debt. It’s important to recognize how high-interest credit card, auto loan, and student loan debt can hinder one’s ability to save and erode their net worth over time. Paying off high-interest debt not only eliminates unnecessary interest costs, but also enhances cash flow flexibility.

2. Mid-Career Strategic Planning.

By now, you should have a solid foundation already built with sizable savings and the know-how to make wise choices in preparation for retirement.

Assess retirement readiness.

Although retirement may still be years away, review your current financial situation and develop reasonable projections to ensure you are on track for the “Golden Years.” Review anticipated retirement income sources (Social Security, employer pension, deferred compensation, etc.) and compare against projected expenses. Look to your investments to bridge any gap between expense needs and income. When projecting retirement investment balances, consider any ongoing contributions between now and retirement and make a reasonable estimate for annualized investment growth. After completing this exercise, consider whether any changes may be necessary such as increasing savings, revising expense expectations, and/or adjusting your retirement date to ensure your desired retirement is on track.

Review asset allocation.

Throughout the latter financial life stages, continuously assess the retirement portfolio allocation to ensure it remains aligned with established objectives and time horizons. Although it’s typical to be heavily invested in equities while many working years remain, it’s wise to revisit the portfolio mix and consider changes as one’s proximity to retirement diminishes.

Focus on debt elimination.

Review outstanding liabilities to determine when they are scheduled to be fully amortized. Entering retirement with zero debt is generally advisable since it reduces ongoing expense obligations and improves cash flow flexibility. Consider making additional payments toward debt principal as warranted in order to transition into retirement debt-free.

Mitigate long-term care risk.

Arguably the most significant retirement financial risk is a health event that may require extensive nursing care in a home.

Approximate median monthly costs of care in the York area range from $4,260 to $11,498 depending upon the type of care, including home health aides, assisted living, or a private room in a nursing home. Such costs can seriously disrupt even sound retirement plans, so careful consideration should be given to mitigating such risk via various potential long-term care insurance solutions.

3. Retirement.

Whether you are near retirement or already retired, this stage can be one of the most enjoyable and rewarding. Financial priorities often broaden to include supporting grandchildren.

Plan your estate.

Periodically review your estate plan and related documents, including wills, Powers of Attorney, and Advanced Medical Directives, to ensure they properly reflect your wishes as your personal and/or financial situations change. Review beneficiary designations of existing retirement accounts, life insurance policies, and benefit plans to ensure they are current and consistent with your wishes.

Optimize social security.

Although the earliest age an individual can commence social security retirement benefits is 62, the amount is significantly reduced compared to deferring benefits until Full Retirement Age (67 currently). In conjunction with a retirement readiness assessment, evaluate the merits of deferring social security until at least Full Retirement Age, or potentially as late as age 70 when benefits are maxed, in order to not only optimize available bonuses and mortality credits but also minimize inflation risk and longevity risk.

Monitor Required Minimum Distributions (RMDs).

The IRS mandates owners of pre-tax retirement accounts distribute a certain percentage of the account balance annually upon attainment of age 72. Carefully monitor and coordinate these distributions among all applicable retirement accounts, such as IRAs and 401ks. The failure to withdraw an RMD, failure to withdraw the full RMD amount, or failure to withdraw RMDs by applicable deadlines subjects the account owner to a potential 50% penalty tax on the shortfall amount.

Consider charitable rollovers.

If charitably inclined, consider Qualified Charitable Distributions (QCDs) from pre-tax IRA accounts upon attainment of age 70 ½. Monies donated to charity directly from a tax-deferred IRA account are counted toward annual required minimum distributions (RMDs) but not included in taxable income. The effect of such rollovers is the same as a tax-deductible charitable donation that otherwise is unavailable to those who do not itemize their tax deductions. Since the charitable rollover amount is not counted as income (as a Required Minimum Distribution otherwise would) other favorable tax implications such as reducing Medicare Part B premiums and/or reducing potential taxation of Social Security benefits – both of which are based upon reported income levels – are also possible.

Contemplate Roth conversions.

Following retirement, but prior to age 72 when Required Minimum Distributions must commence, consider Roth IRA conversions and/or partial taxable retirement account withdrawals depending upon the amount of taxable income anticipated each year. It’s common for one’s marginal federal tax bracket to increase when RMD rules later take effect. Marginal tax rates are also scheduled to increase in 2026 when existing tax laws expire. Prudent conversions and/or withdrawals beforehand may minimize your overall long-term tax burden and reduce future tax uncertainty.

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