By CAREN P. WILLIAMS, CPM®
Senior Vice President and Financial Advisor, Morgan Stanley
If you are under the age of 40, you may not yet be thinking about important long-term financial plans for yourself or your family. Retirement is 20+ years away, right? Even college for your toddler is 17-18 years away, so why plan now? In addition to future needs, how much thought have you given to the risks you or your loved ones may face if you were suddenly unable to financially support yourself or your family due to disability or premature death?
Now, as time is on your side, you should be thinking about these needs and risks. Let’s consider the risks first.
As a young professional, one of your greatest assets is your future earnings power; and you should protect it. You may be an active 30 year old, but long-term disability is a real risk. You could be injured in an auto accident (especially with all of the texting at the wheel these days) or even in a sports-related accident. Of course, you could file for disability payments known as Supplemental Security Income through the Social Security Administration in the event of a disability, but the process is lengthy and your disability may not qualify for the government’s strict definition of “disability.” This is why it’s prudent to seek other insurance to protect against the risk of disability.
Most large companies offer long-term disability coverage for their employees to purchase at a group rate, and the coverage typically pays an amount equal to 60-70% of your monthly base pay. Ask your HR representative if your employer provides such coverage and for details regarding your potential policy. A group rate is typically less expensive than securing an individual policy. However, if your employer does not offer disability coverage or the coverage is insufficient, contact an insurance provider to inquire about rates and coverage under an individual policy. Premiums for individual policies are based on your particular occupation and your income history (usually the last 2-3 years.)
If you have a family, you should also be thinking about life insurance to replace your income in the event of premature death. I recommend term life insurance for most individuals. You should maintain coverage until your children are nearing graduation from college. Therefore, I typically recommend securing a 20-year term policy, and the general rule of thumb is to obtain coverage in an amount equal to 10 x your salary. If you are active and healthy, rates are generally quite affordable for individuals under the age of 50.
Furthermore, if you own a home or have accumulated assets, you should have a will in place to express how your assets should be distributed in the event of death. Today, you can utilize an online service for a very basic will; however, I believe seeking an estate attorney’s advice is best, especially if your net worth is over $200,000, or if you have children.
I have written quite a bit on long-term financial needs. Start saving for retirement as soon as you get a job and increase your savings rate each year until you’re contributing 15% of your pay, up to the annual maximum ($18,500 for 2018). Don’t allow current spending to sidetrack you from enjoying a comfortable lifestyle in retirement. You will certainly thank yourself one day.
Education is another important concern for young parents. We all want the best for our children, but college is expensive. So, let time work to your advantage and start saving early. Establish a 529 college savings account and contribute to it monthly. Tennessee sponsors a 529 plan, but you can use out-of-state 529 plans as well. In general, 529 plans allow you to set aside up to $15,000 per donor per year on an after-tax basis, and withdrawals for qualified expenses are tax-free. Under the recent tax law changes, you can now use 529 assets for primary and secondary school expenses up to $10,000/year, in addition to qualified higher education expenses.
These are the most common risks and future needs facing today’s young professional. Of course, your particular situation may be different, but addressing these types of concerns now could help you and your loved ones reach your financial goals.
For more information on these or other topics, feel free to contact me at firstname.lastname@example.org.
Caren Williams is a Financial Advisor with Morgan Stanley Global Wealth Management in Nashville, and may be reached at email@example.com.