Paola Banchero recently attended a session put on by the Society for Financial Awareness, which is a nonprofit speakers bureau. The free, three-hour session provided information and a point of view about investing, but no requirement to follow up with the financial institution that provided the speaker. As 401(k)s and similar accounts have replaced pensions for most Americans, our savings depend on our good judgment.
A lifelong friend, who is my age, retired last year. A sibling, four years older, retired two years ago. Another friend, who is self-employed, has set up a way to bring in income with her stock picks, which pay regular dividends. These examples have made me think about my own future. So much of our financial security is riding on our good judgment.
No future without a present
I knew when I decided to be a journalist, I was entering a field with notoriously low pay except for a few in the highest stratospheres of national news. I had amassed a significant amount of debt in pursuit of my academic goals by the time I was 23. I also had a couple of advantages that others didn't. I had taken a business reporting class in journalism school, and I had also signed up for a 401(k) in my first real job. At the session when I enrolled, the Fidelity rep showed a chart about how your investments grow exponentially the younger you start. I also had a parent who would occasionally send me a couple of hundred dollars in my early adulthood, enough to weather unforeseen expenses, like car repairs.
But even then, I didn't understand how much life in my 70s and 80s and possibly 90s would depend on choices in my 20s and 30s. That's in part because I entered the workforce after the 401(k) replaced pensions as the main way Americans fund their retirement. In this era, the investment risk is not on employers but on employees.
Unless we have generational wealth, we need a plan to live into our golden years.
Here are some things to think about as you wrap up your work life and head into retirement or if you still have time to execute your financial goals.
1. Budget. I don't track my spending meticulously, though I have made faithful efforts to do so in the past. Nearly every personal finance adviser says that knowing what you spend is a way to better manage your money. You don't have to track every penny forever. Try it for a few months, maybe half a year. You'll see how your spending habits change with the season-maybe you spend more in the winter months than you realize on heating your home or flying to a warm destination.
2. Save. Spend less than you earn. Some call this the "pay yourself first" approach. Parking some cash in a money market account or certificate of deposit with a higher interest rate than a plain account is a start. Understanding your cash flow can help you determine how much you can save and invest. Make sure to invest so that you can benefit from market gains.
3. Avoid debt. If you have debt, particularly credit card debt, pay it off as soon as you can. It doesn't make sense to make 2.5% on a bank account when you're paying 20% or more in interest on your credit card balance per year. Pay off the credit card with the highest interest first. Can you buy a new car with cash? Can you choose (and help your loved ones choose) an educational path that will leave you debt-free? The Alaska Legal Services Corporation can help you if you have debt problems. https://www.alsc-law.org/
4. Take advantage of any employee-sponsored investment plan, like a 401(k) or 403(b) plan. Some employers contribute to your saving goals. When you invest in a Roth IRA, you pay taxes now. With a traditional IRA, contributions are tax-deductible now, but withdrawals in retirement are taxed as income. You are also subject to Required Minimum Distributions (RMDs) starting at age 73. If you have all your money in a traditional IRA, talk to your financial institution and a CPA about the pros and cons of moving some or all your traditional IRA to a Roth IRA. They can help you develop a strategy. Be careful what you allow your 401(k) or similar plan to invest in, as some investments are riskier than others. https://bit.ly/4w0LD1p
5. Keep track of what you will receive from Social Security. You can log in to your Social Security account by establishing a government account. I checked mine recently, and it showed me what I can expect to receive monthly at different retirement ages. The Savvy Senior had an article about this recently. https://bit.ly/4yiq2Tk Ideally, Social Security isn't your only income in retirement because for most people their expenses exceed their monthly Social Security income.
6. There is something to be said for investing in a broad index fund rather than trying to be some kind of stock-picking guru on your own. Try to ride out the ups and downs in the market by staying put when stock prices drop.
7. Diversify your holdings. As we age, we need to be aware that a big market drop will harm us more in our 80s than in our 50s. This means we might want to hold less in equities at an older age and more in stable income investments.
8. Contribute to charities you care about. If you think children's health and well-being is important, invest in nonprofits that do this work. Building charitable contributions into your budget will make your giving consistent and consequential. Some people use a donor-advised fund, a charitable giving account that lets you to make an irrevocable contribution to a public charity, receive an immediate tax deduction, and then recommend grants from that fund to your preferred IRS-approved nonprofits over time.
9. Have an estate plan. Don't leave your heirs wondering what you had in mind, or worse, fighting with one another about your estate. Kenneth Kirk's articles are a great resource to help you understand how and why to establish a will and possibly a trust for your estate.
Should you hire a financial planner?
Although I have never used the services of a certified financial planner -I'm too frugal to see 1% of my holdings set aside for this every year-you might want to hire one. Instead, I have made use of my financial institution's investment pros. In my situation, this is free advice. They create a plan, show me how I'm doing, and indicate what kind of confidence I can have that I won't run out of money, even if I live into my late 90s.
Books to help you manage your money
"Spend Well, Live Rich" (previously published as "7 Money Mantras for a Richer Life: How to Get What You Want With the Money You Have,") by Michelle Singletary.
"Retirement Bites: A Gen X Guide to Securing Your Financial Future" by Kerry Hannon and Janna Herron
"The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life," by J.L. Collins.
