Financial Advice I Would Give to My 20-Something Self
I recently celebrated a milestone birthday – though not one that would normally be seen as such. At age 44, I am the same number of years removed from being legally able to enjoy a beer as the number of years until I can enjoy full retirement benefits from social security. Age 44 seems about as “middle age” as any, and it got me thinking about my life and career, and the decisions I have made along the way. I can look back on things I am proud of but also opportunities I didn’t take full advantage of, particularly early on in my career. Below are three financial opportunities everyone in their 20s should consider:
After-Tax Savings in a Brokerage Account – when I meet with the 20-something aged children and grandchild of clients, two savings strategies are common – retirement plan contributions and cash savings. These are very important accounts to fund, as retirement savings will compound and grow over decades, and emergencies that require immediate liquidity can happen at any time.
However, there is another savings component often missing in the balance sheets of younger workers I meet with: brokerage accounts invested in the stock market. The contributions don’t provide an immediate tax benefit like they do with a 401(k), however these accounts can be quite tax efficient with the right investment selection and limited turnover. Balances will fluctuate a lot more than a high yield savings account but are more likely to outpace cash returns over time to build wealth. Even small contributions can add up if they are made regularly.
Health Savings Account (HSA) – this is one of the only savings accounts out there that offers a triple tax advantage; contributions reduce your taxable income, the growth is tax free, and withdrawals are tax free if used to pay for eligible medical expenses.
The catch? One needs to be on a high-deductible insurance plan to be eligible to contribute to an HSA. The high-deductible plans are cheaper than more traditional insurance plans, but they carry a unique risk during the early years of contributing to an HSA. A serious illness or injury can wipe out a significant portion of a recently funded HSA. That said, medical costs are typically lower for younger people and increase as we age, so starting an HSA in your 20s carries a lot less risk compared to funding an HSA for the first time in your 40s or 50s.
After 20 years of HSA contributions and market growth, assuming you don’t use the account for current medical costs, the balance should be sufficiently high to handle those unexpected, but more probable health issues that may occur in middle age. Longer term, 40+ years of HSA contributions and growth can help pay for medical costs in retirement while letting your other assets continue to grow.
Estate Planning – it’s never too early to develop an estate plan, though I find very few young adults have put much thought into it (and far too few older adults I might add). A visit to an estate planning attorney is the gold standard, however the cost and effort can be a deterrent to action. Younger people can take advantage of their (usually) less complicated estates where a “DIY” approach is quite impactful.
The three questions an estate plan should address for someone in their 20s is “what happens to my assets when I die,” “who can make medical decisions for me if I am unable to,” and “who can make financial decisions for me if I am unable to.” Please note, if minor children are involved, a visit to an estate attorney is highly recommended over a DIY approach.
Adding transfer-on-death (TOD) or payable-on-death (POD) instructions to brokerage and bank accounts will allow those assets to pass on without having to draft a will or go through probate. You’ll also want to review the beneficiary designations on your retirement accounts to ensure they are coordinated with your TOD/POD designees.
Digital asset planning is becoming more important by the year. Having an inventory of your online accounts (secured in a safe place) with login credentials is a good place to start. Some online services now offer their own “legacy contact” settings that should be reviewed.
Medical directives and health care agents can be drafted without an attorney using online resources such as AARP (https://www.aarp.org/caregiving/financial-legal/free-printable-advance-directives/). Be sure to discuss and share this with your health care agent.
Your financial institution will have their own paperwork to designate a financial power of attorney. Keep in mind this power will be limited to the specific institution, so you may need to repeat the process. A durable power of attorney can act on your behalf at any time, so this should be someone in whom you have the utmost trust.
These DIY steps are a great start to an estate plan. Be sure to share this plan with someone you trust and let them know where they can find all the documents.
All this advice can apply regardless of age. But in our experience with clients who succeed in meeting their financial goals, starting early and being consistent with your strategy is a key element to that success.
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