Advice for the New Workforce
Making sure your kids are prepared to make smart financial decisions may be one of the last lessons you can teach them. Entering the workforce in a full-time position is one of the most exciting and nerve-racking times for a young adult (and their parents, too!).
Amid all the fast-paced decisions and changes are some slow burning priorities that tend to get lost. I have provided some guidance on common financial questions to pass to your sons and daughters and grandchildren as they navigate their new lifestyle.
Do they need to be saving for retirement already?
Yes. “Need” may not be the right word, but it’s strongly encouraged that they start as soon as possible. Lots of people have successfully retired and didn’t start saving until later in life, but why push it? Time and compounding gains are the best assets the young have. Time can mitigate mistakes and compound successes. There is some liquidity in those retirement funds (albeit with potential penalties and taxes), so they shouldn’t think they’re stranded if they need to access that money. Here are some short-term funding strategies if they’re truly nervous about “over-saving”.
They have student loans. Should they be saving to their 401(k) before paying them off?
Yes (conditionally). It is likely that their employer has some sort of a 401(k) match and they should contribute the minimum necessary to take full advantage of that match. There may be some vesting requirements on the employer match, so they should know more on that before starting contributions.
Beyond getting the match and making minimum loan payments, the loan vs. 401(k) tradeoff is different for everyone. For example, say loans have a 5% interest rate compounding over 10 years. Then compare to an expected personal rate of return on investments (perhaps 6%+). That money is going to be compounding for 30+ years. This question is more about risk tolerance than anything else. If they’re comfortable with investment risk and debt, then stick to lower loan payments and flood the 401(k). However, not everyone is comfortable in debt, so it may be beneficial to prioritize paying off loans, but still contributing to the 401(k) as they can.
They are already maxing the 401(k). What next?
That’s awesome. The first thing I recommend is setting up an official discussion with a financial planner that can tailor advice to their situation. However, here are a few ideas to consider:
If they have a high deductible health plan, they will want to enroll in the Health Savings Account and start contributing. The HSA offers triple tax advantage by allowing pre-tax dollars to go in, tax-exempt growth, and tax-exempt withdrawal if the funds go to qualified health expenses.
If they are considering going back to school at all, start contributing to a 529 savings plan. Just save some money here and there and they may be able to take advantage of state income tax benefits. There is tax-free growth on a 529 account if used for qualified education expenses. If a balance remains, they can hold onto the account and it let it grow. Account owners can change 529 plan beneficiaries, so unused 529 funds can go to their children (once they’re born). That will allow more than 18 years of compounding.
They may not be able to save much more pre-tax money outside of your 401(k). However, the income phaseouts for Roth IRA contributions are quite a bit higher than traditional IRAs. Roth IRAs or non-deductible contributions to traditional IRAs are great to build up the tax-exempt “bucket” of financial assets. Qualified Roth distributions require a 5-year holding period, so it may be best to start contributing as soon as possible
It’s clear that there is a lot to weigh with each financial situation. There are no cookie cutter answers, even when workers are just starting to save and earn. For more information or other questions consider reaching out and inviting your kids to a meeting with your Relationship Manager. Holistic financial planning includes the whole family, and Vantage welcomes the opportunity to work with them.
The facts and opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Where applicable, all data and information has been gathered from sources believed to be accurate such as the internet, nonaffiliated 3rd parties, news articles and professional subscriptions but this information is not warranted to be correct, complete or true. Vantage Financial Partners Limited, Inc. and its agents are not tax advisors or accountants. Qualified accounts and ERISA based plans include limits and restrictions. Understanding the full impact of money deposited into these types of accounts is essential when making decisions on where to investment your money. Be sure to consult your plan advisor or HR department before investing in any work sponsored program.