You’ve entered your 40s and 50s and retirement no longer feels like a pipe dream. It’s far enough away that you can’t quite visualize it, but it’s close enough around the corner to have you thinking about taking your retirement plan more seriously. Maybe you have an average 401(k) balance for a 40-49 year-old of $100,300, or maybe you have the median 401(k) balance in a 401(k) for a 50-59 year-old of $53,400, or maybe your 401(k) balance is well above those figures.¹ Maybe you don’t have a 401(k) balance since you used that money to buy that awesome new red Corvette on a whim during your midlife crisis since your neighbor bought a new Tesla and you wanted to one-up them with your new Corvette. Whichever of these scenarios most resembles you, just remember that you got to where you are today because of your past actions, and do not blame (or congratulate) present you too much. Don’t fixate on the past. Focus on your future and always do your best to never compare yourself to other people. Your life path is your life path.

However, being in the sandwich generation might give you more speedbumps in your life path than other age groups. You could be juggling figuring out how to raise kids, funding their college, and how to financially support your aging parents. How are you going to sort out these expenses and still find a way to save for your retirement? Let’s walk through some practical steps that can help make sure that your retirement plan is on track.

Step 1: Know your Finances.

If you don’t have a clear picture of your current financial position, the first step is just writing it down. What are all of your current assets, what are any of your current debts, and what is your net worth? How much are you saving towards retirement, how much of your monthly income goes towards paying down debt, and do you have a monthly budget that you use? If you don’t have a budget, now would be a good time to get one set up. It’s also good to know your risk tolerance when it comes to making investment decisions so that you know how much to reasonably save toward your financial goals in retirement without feeling nervous every time CNBC or some other news outlet talks about how the S&P 500 Index went up or down X points today.² We’ve found that many people working with financial advisors who get into heated conversations about performance simply had a disconnect between the amount of risk the investor was willing to accept vs how the investor was invested. This is why having a properly diversified portfolio is critical when it comes to financial planning. The three things you can control in investing are: (1) how much you pay, (2) how you are invested, and (3) how long you are invested.

This is also a great time in your life to work on paying down debt. Some debt, like a mortgage, isn’t as detrimental to your finances in retirement as something like credit card debt or student loans. The general rule of thumb that we use is that if your investments based on your risk tolerance dictate that you should expect to earn X% and the debt is at an interest rate of Y% and if X is greater than Y, it is better to continue paying the minimum amount towards the debt and invest any excess cash. If Y is greater than X, it is better to pay off the debt with any excess cash and not invest until that debt is paid off.

As a quick example, say your risk tolerance implies that you can reasonably expect to earn 5% on your investments. You have a 30-year mortgage at a 4% interest rate and some credit card debt at a 25% interest rate. It is generally going to be better to use any excess cash towards paying off the credit card debt than investing and investing will generally be more advantageous longer-term than paying off your mortgage early.

Step 2: Prioritize your Goals.

Now that you know what you must work with, the next step is writing down your goals and prioritizing them. Sometimes you get to pick and choose the order and sometimes the ordering is predetermined for you. Assume that you were the client in the example in the previous step. Paying off credit card debt is most likely a priority and probably at the top of your list. After the credit card debt is paid off, then you can start working your way down your list of goals. Let’s take the following client profile as an example of how we would prioritize their financial goals.

Mr. and Mrs. Jones have the following profile:

• They are both 48 years old. They both earn $100,000 per year.
• They have two kids, aged 16 and 12. They want both kids to go to college and will financially support them however they can.
• They own their home and have a 30-year mortgage at a 4% interest rate.
• They have $10,000 in credit card debt at a 25% interest rate.
• Their risk tolerance implies that they can reasonably expect to earn 5% on their investments.
• They have $50,000 in their bank account.
• They spend $6,000 per month ($72,000 per year) on basic living expenses for their family.
• Mr. Jones has $100,000 in a 401(k). Mr. Jones contributes 3% of his salary, but his employer matches up to 5% of his contributions.
• Mrs. Jones has $100,000 in a 401(k). Mrs. Jones contributes 3% of her salary, but her employer matches up to 5% of her contributions.
• They both want to retire at age 65.
• Both sets of their parents are still living at age 80 and they need to support them until age 90 (since no one in either of their families has lived past age 90). Both sets of parents need $10,000 per year.
• They recently started saving $2,000 per month into a savings account earning 0% interest. They are interested in learning about other ways to use these excess savings.

How should they prioritize their goals and what to do with the $2,000 per month in additional savings? An example could be the following:

1. Pay off credit card debt.
   1. Similar to the example in the first step, since 25% is higher than the 5% they can reasonably expect to earn on their investments and they should have sufficient cash to pay off the credit card debt, the first goal should be paying off the credit card debt.
2. Make sure they save what they can into their 401(k).
   1. After the credit card debt has been paid, they should focus on saving what they can towards retirement and continue to take advantage of the employer match on contributions.
3. Make sure there are funds for their parents.
   1. As much as Mr. and Mrs. Jones love their parents, they need to make sure that their future is taken care of first. After goal 2 has been satisfied, they can focus on having sufficient funds to support their parents.
4. Save towards their kids’ college aspirations.
   1. Similarly, we need to make sure that Mr. and Mrs. Jones take care of themselves first. The kids can always get student loans, but their aging grandparents aren’t easily able to go back to work if Mr. and Mrs. Jones can’t support them.
5. Pay down their mortgage.
   1. Since the mortgage is at a lower interest rate of 4% than what Mr. and Mrs. Jones’s investments are reasonably expected to earn at 5% per year, this goal can be addressed after all of the other goals have been satisfied.

Step 3: Identify What Retirement Means to You.

Now that your goals are prioritized and you have a vision financially of how to get to retirement, it’s critical to ask yourself what retirement means to you. Do you want to volunteer more, travel, learn a new hobby, embrace an old hobby, spend time with family, or something else? Take some time to think about it. Sometimes retirement just means reducing your work hours. There are some business owners we work with where the word “retirement” has always had quotes around it because they love what they do and don’t want to stop. Some people if you ask them when they want to retire, they just flatly answer, “Yesterday.” Most people are somewhere in the middle. The key is just like your financial plan, you need a plan for what you’ll do after you retire.

Retirement could be 20 years, 30 years, or even longer for you and longer retirement means accounting for healthcare costs in retirement. If your goal is to play pickleball every day in retirement and you tore your ACL for example, the recovery time and the costs associated with that recovery will be greater in your 80s than they were in your 50s. Therefore, you should work on putting some padding into your financial plan if you were to undergo a health event. If you have access to a high-deductible health plan through your employer and are in reasonably good health for your age, it may be worth it to start saving in a Health Savings Account (HSA). The HSA is a triple tax-free vehicle when used for medical expenses. The triple tax-free aspect of the HSA that I’m referring to means that you get a tax deduction for contributing to the HSA, funds in the HSA grow tax-free, and you can withdraw from the HSA tax-free as long as those distributions are used for qualified medical expenses. If they aren’t used for qualified medical expenses, you’ll be taxed on the withdrawals at ordinary income tax rates and be subject to a 20% penalty if you withdraw those funds before 65.

Step 4: Start Your Estate Plan.

The average net worth of someone between the ages of 45-54 is $975,800 and the median net worth in that same age group is $247,200.³ The odds are that you probably have built up an estate and have loved ones in your life that you would like to make sure are financially taken care of if you were to pass away. The way to safeguard against this risk of premature death is to have a clear and concise estate plan. An estate plan is a series of legal documents that define how you want your estate distributed at your passing, who you want to handle those legal affairs, and how your estate will be handled within probate court. Each state is different in what documents are needed, so it is important to consult with an estate planning attorney who is well-versed in your state on what series of documents are right for you. As a reference, here are some typical documents that may be part of a person’s estate plan:

• Family Trust – The Family Trust (or Revocable Living Trust) is simply a legal document that dictates which of your heirs get what percentage of your assets you choose at the time of your death. The person establishing the Trust is called the grantor. The trustee is the person (or persons) in the Trust who can make changes to the Trust during the grantor’s lifetime. The trustee and the grantor are usually the same person, but they aren’t required to be the same person. Assets in the Family Trust also avoid probate. Probate can be expensive for your heirs (we are talking $10,000 or more in some states), so it is best to avoid probate when possible. The person who handles the affairs of the Trust after the trustees of the Trust have passed away is called the executor.
• Will – This is the traditional document of “I leave $X to my son, $Y to my daughter, $Z to my dog, etc.” Depending on the state, this alone doesn’t usually avoid probate. People can also come out of the woodwork when your heirs are in probate court to say that they have some claim to your estate. To help combat this, well-written Wills have language that specifically disclaims certain people in the family, leaves them $1 (or some other small amount), or other clear language to avoid people contesting your Will.
• Power of Attorney – A Power of Attorney document allows for your legal and financial affairs to carry on if you were unable to do those affairs yourself.
• Healthcare Directive – The Healthcare Directive dictates items like whether or not you would want to prolong life, donate your organs to research, and other health-related items if you were not able to make those decisions yourself.
• Guardianship – The Guardianship documents detail who would watch your minor children if you passed before they are adults. The person who would keep watch is called the conservator and would work in tandem with the executor of the Trust to make sure the minor children’s interests in the Trust are taken care of.

Step 5: Stick to the Financial Plan.

A plan to improve your financial condition is only as good as the time and effort you put into it. Don’t be like the financial equivalent of the target demographic for Planet Fitness that sees the commercials on New Year’s Eve and shows up to the gym the first week of January, quits, and then weighs 5 pounds more the next year’s New Year’s Eve Planet Fitness commercials are shown and looks dumbfounded in the mirror wondering what happened. Like with working out and losing weight, you just need to put in the time and effort and stick with the financial plan. Sometimes that’s easier said than done. If you need an accountability partner and personal trainer for your financial plan, give us a call at 714-282-1566 or email us at financialplanning@bfsg.com. We’ll work with you on developing your comprehensive financial plan to stick to. If you’re content with doing a financial plan on your own, that’s perfectly fine too. The main takeaway here is that you aren’t too late to improve your financial condition and you might be closer to having your vision of retirement be a reality than you might think.

Sources:

1. https://www.forbes.com/sites/davidrae/2023/11/21/what-is-the-average-retirement-savings-by-age/?sh=18fa53d0fdad
2. The S&P 500 Index is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market.
3. https://www.nerdwallet.com/article/finance/average-net-worth-by-age

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