20/20 Vision in Your 20’s and Beyond
You know the adage “hindsight is 20/20”, and if you are in your twenties or thirties, your vision may still be 20/20. Although no one is certain of the future economy, inflation, or tax landscape… it is almost a guarantee that taxes will be higher in the future. What we are certain and clear on, is the power of the Time Value of Money. Consider this your eye exam to maintain perfect vision well beyond your 20’s:
GUIDANCE TO SAVE
There are many opinions on how much to save and budget but it ultimately depends on individual circumstances. There are also no guarantees on what the purchasing power of those dollars will be in the future nor the type of returns. The following is a framework to simplify what may be hard to envision. In the spirit of clarity, first, it’s important to understand your income and expenses; general budgeting guidance is 50/30/20 and is broken out as follows:
· 50% of your income is spent on needs (living expenses, groceries, minimum debt payments)
· 30% of income on wants (clothing, travel, entertainment, cable & streaming services), and
· 20% of income is saved and/or applied to additional debt payments.
To set yourself up for success, pay yourself first by automatically saving (20%), then pay for living expenses (50%), and if there’s anything remaining buy your wants (30%) with confidence sans guilt! Savings includes an emergency fund (3-12 months), near-term (down-payment for home) and long-term (retirement) goals.
RETIREMENT
It is never too early – or late – to start saving. If you are an employee, understand how much your employer will match to pre-tax and after-tax contributions, then, if possible, contribute at least up the max match offered. Contributions to 401(k), 403(b), 457(b) and Roth 401(k)s are limited to $23,000 annually ($7,500 catch-up for those aged 50+). What does that mean?
401(k) Contributions: These are pre-tax dollars and delays taxes on the contribution (principal) and earnings (interest, dividends, gains) until funds are withdrawn. Withdrawals generally occur after age 59½ to avoid penalties unless there are unique circumstances (talk to your tax professional for more information). For example, if you earn $50,000 and your employer matches up to 4%, then you should contribute at least $166.66 per month or $2,000 annually to maximize the 4% employer match.
Retirement calculators can help you to calculate your potential savings. Here are a few examples using a NerdWallet calculator, to demonstrate the power of Time Value of Money and what happens if you delay making contributions to your 401(k):
Roth 401(k) or Roth IRA.
Roth contributions are after-tax dollars and will grow tax-free and withdraw tax-free.
· If your employer offers a Roth 401(k), you can also contribute after-tax dollars to your retirement account and the pre-tax 401(k) contribution.
What’s the benefit?
· At the current Federal Tax, a Single person’s income is taxed at 12% up $47,150 and then jumps up to 22% for every dollar earned after $47,150 and progresses up to 37% for income over $609,350.
What are the considerations?
· Roth 401(k) contributions are included in the $23,000 annual contribution limits. Continuing with the scenario presented in the 401(k) contribution above for a 25-year-old, if you have contributed $2,000 to your 401(k) – pre-tax dollars you can contribute up to $21,000 to the Roth 401(k) to maximize the limit.
· Roth IRA contributions have income limitations and phase-outs for direct contributions (talk to your tax professional for more information).
· If you are Single and have income less than $146,000 you are eligible to contribute up to $7,000 (age 50+ has a catch up of $1,000) and phases-out at $161,000. If you are Married Filing Jointly, you can contribute if income is less than $230,000 and phases-out at $240,000 (talk to your tax professional for more information).
Other Considerations
When you reach 18, you are considered an adult, and your parents can no longer make medical decisions on your behalf. To assist you make sure to have the following documents completed: 1) Name account beneficiaries 2) Power of Attorney 3) Healthcare directive and 4) If you’re in college, FERPA release.
Rx
When you’re in your 20’s or 30’s time is on your side. We hope this exam has given a renewed and clear perspective on how and why to save early and often. Think about purchases that may seem impulsive at least 24-hours or try to envision how the purchase will impact you 10-minutes, 10-months, or 10-years from now. We hope you can maintain clarity in saving for now and your foreseeable future. When things get blurry, we’re here to help you.
Krystal C. Lee, MBA, CFP® is Director of Financial Planning and a Portfolio Manager. Krystal is a CERTIFIED FINANCIAL PLANNER™ and earned the Certificate in ESG Investing awarded by the CFA Institute. To speak with Krystal Lee, please contact our office at (503) 292-1041 or via email at info@allentrust.com.