You’re old enough. You’re wealthy enough. People depend on you. There’s no excuse for procrastinating!
By Kaity Perez, JD, LLM and James Nevers, CFP
A recent Caring.com survey found that nearly four in five millennials (78%) and 64 percent of Generation Xers (ages 37-52) do not have a will or living trust. Considering how many of those young adults are parents, homeowners and investors in their prime earning years, those are disturbing statistics.
Planning for the future is always a good idea. It’s an even better idea if you have young children and you have significant earning potential. Many young professional parents can benefit greatly from basic financial and estate planning, even if they think they are not old enough or wealthy enough to warrant it.
Here are four key financial planning considerations and three essential estate planning considerations for successful young couples in the early stages of their career trajectory. Let’s start with financial planning:
1. Maximizing your employee compensation package to save for the future
Employer sponsored retirement plans such as the ubiquitous 401(k) are designed to help workers save for retirement consistently and efficiently. Many employers provide matching contributions to incentivize you to participate in the plan. Your contributions are tax deductible and earnings inside the plan are tax deferred until you withdraw them in retirement. Several employers also offer additional benefits such as Employee Stock Purchase Plans, Health Savings Accounts, and reimbursement for gym memberships. Each company is a little different. Be sure you fully understand your company’s benefits offerings thoroughly before e-signing on the (digital) dotted line.
2. College savings plans
As with retirement planning, the sooner you start saving for your children’s higher education, the better prepared you will be. A 529 college savings plan provides tax-free growth of your savings and tax-free withdrawals for qualified college expenses when your little one is ready to leave the nest. Trust us, it happens fast! Most plans allow you to invest in a wide variety of assets based on your risk tolerance and time horizon. Age-based portfolios are one way to go, as they are very aggressive when your child is young and automatically become more conservative (thus reducing your risk exposure) as your child gets closer to college age. In many ways, age-based portfolios follow a similar “glide path” to your retirement savings plan.
3. Debt management
Most young professionals feel burdened by student debt, car loans, and large mortgages. Pay off high interest credit cards first, then create a plan to pay down your other debts. Once you accomplish a goal of paying down a specific debt, give yourself a pat on the back and then direct your extra cash on hand to paying down other debts, especially those with high interest rates.
4. Risk management – life and disability insurance
Having an appropriate amount of life insurance in place ensures that your family is financially protected in the event that you die prematurely or suffer a disability that prevents you from working for long periods of time. It is common for young professionals to need several million dollars in life and disability coverage, especially if there is only one working spouse. Most employers offer very basic life and disability coverage that falls short of what high-earning young couples need. We recommend that you obtain a supplemental policy to fit your needs. There’s never a better time to get insurance than when you are young and healthy. That’s when you are best positioned to lock in lower rates and more favorable terms.
Now, let’s look at some very important estate planning considerations for young professionals:
Many young parents believe they are neither old enough nor wealthy enough to need an estate plan. However, basic estate planning documents cover more than just “who gets what” when you die and chances are, you could benefit greatly by having these documents in place. Let’s take a closer look at three of the most important estate planning considerations:
1. Selecting a guardian for your young children
Estate planning documents allow you to name a guardian (and alternate guardians) for your minor children. These provisions are very helpful in rare circumstances when parents die while their children are under the age of eighteen. Many young parents who name guardians in their estate planning documents are put at ease knowing that their children will be cared for by individuals of their choosing—not the state’s choosing–in case such a tragic event occurs.
2. Selecting agents to make financial and health care decisions on your behalf
Basic estate planning documents often include Powers of Attorney (POA), which allow you to appoint certain trusted individuals to manage your affairs in the event you become incapacitated (for example, if you become seriously ill or disabled). A Durable Power of Attorney POA (for financial matters) allows individuals of your choosing to manage your assets and to make financial decisions on your behalf. A Durable POA for Health Care allows individuals of your choosing to make decisions regarding your healthcare, including medical procedures and end of life care. Many individuals name a spouse, sibling, or a trusted friend to serve in these important roles. You don’t need to name a single trusted person to fulfill all of those important roles—in fact, many people split this responsibility among multiple trusted family members and friends. Executing Powers of Attorney is prudent regardless of your financial status, since in their absence, complete disability could result in a court-imposed guardianship over your person and/or finances.
3. Selecting fiduciaries to manage your estate and your children’s inheritance
Estate planning documents also permit you to select individuals or institutions to manage your wealth for the benefit of your children (or other beneficiaries) at your death. For example, if you establish a trust for the benefit of your children, it is essential to select the appropriate trustee to manage the inheritance your children may receive. Selecting trusted individuals in important fiduciary roles comforts many young parents, particularly those with financially inexperienced children.
When you have estate planning documents in place that cover more than just the transfer of your assets, you’ll gain the peace of mind that comes with knowing your wishes will be honored when you pass on.
Nobody enjoys contemplating their own demise, but we’ve all encountered situations in which a family’s primary breadwinner died or was disabled during their prime earning years. There’s never a better time to plan for these unfortunate events than when you are young and healthy. The rates and actuarial tables are on your side and you’ll have decades of peace of mind knowing that you and your family have a plan and are protected should a worst-case scenario impact you.
James Nevers, CFP® is an Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, Directors and Executives at Amazon, Microsoft, and Boeing, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.