Understanding Personal Finances – Spring 2024

Financial planning is for everyone

Who needs financial planning? Every adult does. It helps you limit spending and debt, deal with emergencies, manage risk and taxes, save and invest for goals, and generally live with more peace of mind and less stress. People who create financial plans are better able to achieve security and reach their financial goals. It’s best to start your planning as early as possible, but it’s never too late to start.

What follows are suggested steps for you to take based on the age group you’re in. Read all of the guidance, including steps for age groups other than your own. That way, you can either know what lies ahead for you or catch up on things you didn’t do when you were younger.

20s to mid-30s

Live below your means. One principle of financial wellbeing is to spend less than what you make each month. If you need to downshift your spending, know that even small cuts can add up to big rewards over time. For example, if you spend $10 a week less on coffeehouse lattes, you’ll cut expenses by about $520 a year. If you invest that amount each year in your workplace retirement plan, an IRA or another tax-deferred account, and you earn 6% annually on your investment, after 20 years, you’ll have a pot worth more than $20,000.

Following a personal budget can help you manage expenses and debt, save for a house or other goals, and improve your financial wellbeing. To get started, use the “Live by a budget” goal on your EY Navigate™ website or mobile app.

Pay off student loans. Consider refinancing, which means paying off one or more existing student loans with a single new loan. Not only would this simplify your student debt, but it might also enable you to reduce your monthly spending on such debt, freeing up more money to save for other goals. Just remember that, in some cases, lowering your monthly spending on student loans by extending the amount of time until you’ve paid them off could cause you to pay more total interest over time. To learn about repayment options offered on student loans, visit studentaid.gov.

Establish good credit. Pay bills on time. Avoid maxing out credit cards. Pay down debt. Avoid opening a lot of new accounts within a brief time span. Monitor your credit reports for errors, and fix any errors you find. These and other steps will help you achieve and maintain good credit scores, which have a direct impact on the interest rates you might pay when borrowing money.

Build an emergency fund. Should you ever face a serious illness or injury, major car repairs, or some other unexpected, big drain on your finances, a ready cash reserve could help you avoid a crisis. Set a goal to accumulate three to six months of basic living expenses, but even having a few hundred dollars tucked away for emergencies can offer you good protection.

Save for financial freedom. The sooner you start saving and investing for financial freedom (sometimes referred to as “retirement”), the more time your money will be able to grow at an increasing rate through the compounding of investment earnings. Compounding is when your earnings attract more earnings, creating a snowball effect that causes your savings to grow ever more rapidly. The effect gets magnified when you defer taxes on earnings, as you can typically do in a workplace retirement plan (such as a 401(k), 403(b) or 457 plan) or an IRA.

Saving becomes automatic when you use payroll deductions to contribute to your workplace retirement plan. If your plan offers matching contributions, try to save at least enough to get the full match. Otherwise, you’re leaving free money on the table.

Invest with care. Invest your savings based on the number of years before you wish to achieve the goal for which you’re investing, the return you’d like to achieve and your tolerance for risk. Revisit your asset allocation (investment mix) at least once a year or whenever you have a major life event, like getting married or divorced or adding a child to your family.

Mid-30s to late 40s

Increase your retirement plan savings by at least 1% annually. Do this on your own or take advantage of an “auto-escalation” option if your plan offers it. Auto-escalation automatically increases your plan contributions by 1% a year. Also consider increasing your contribution rate every time you get a pay raise.

If you change employers, keep retirement savings tax-deferred. The employer you’re leaving may allow you to continue holding assets in that employer’s retirement plan. Or you can roll over these assets to a retirement plan with your new employer or an IRA. Either way, you’ll be able to keep retirement savings tax-deferred until you’re ready to retire.

Stay on top of your asset allocation. Continue to review your investment mix for retirement annually or whenever you have a big life event.

Save for your child’s college education. If you decide to add a child to your family, start a college savings fund as early as possible in the child’s life and keep contributing regularly to the fund. Consider opportunities to get tax advantages on your savings. For example, a 529 plan allows tax-free withdrawals from your savings to pay for qualified college costs. You’re typically given a specific set of investment fund options. Your contributions are not deductible on your federal income tax return, but some states offer a state tax deduction.

Be properly insured. Having the right types and levels of insurance is essential to your financial security. Take advantage of employer-sponsored programs like health, long-term disability and umbrella (liability) insurance. These are typically competitive programs that have been negotiated for group discounts. Revisit your insurance needs at least yearly or whenever you have a major life change, like getting married or divorced or adding a child to your household.

Take estate planning seriously. Every adult, regardless of age, marital status or net worth, needs to have at least basic estate planning documents in place. And there’s more to an estate plan than just a will. Among the other documents you need are health care and financial powers of attorney, which appoint someone to make critical decisions on your behalf in the event that you become incapacitated, and a living will, which states whether you wish to accept or refuse life-sustaining treatment in the event that you become terminally ill. Once you have an estate plan set up, review it at least annually and whenever there are changes in tax law, your family situation or your net worth.

50s and beyond

Fine-tune your retirement goals. Be as specific as possible about when you expect to retire. Also, think in greater detail about what your retirement will look like. If any of your retirement goals have changed, you may need to modify your savings and investment strategy accordingly.

Some questions to ask yourself:

Assess your financial readiness for retirement. Generally, once you retire, you’ll need to replace 70% to 90% of the annual gross income you received during the 12 months or so before you retired. This suggested “retirement income replacement ratio” is less than 100% because, like most people, you may end up spending less in retirement than during your working years. You might no longer need to spend on things like a work wardrobe, commuting and workday lunches. If you’re currently paying on a mortgage, the loan might be paid off by the time you retire. You’ll typically no longer owe FICA taxes, and you won’t be saving for retirement anymore. Certain expenses may increase, like medical expenses, vacation travel and hobbies, but, for most people, total expenses go down after they retire.

When you’re within a few years of retirement, try to estimate your retirement income need in terms of a specific annual dollar amount. Start by looking at your current expenses, then determine – line by line – which expenses may increase, which may decrease and which may go away. Your EY Navigate financial planner can help by providing you with a thorough analysis, based on your goals, life expectancy, inflation and other factors, of your retirement income need.

Weigh your options if you’re headed for a retirement income shortfall. If you’re projected to have a gap between the retirement income you’ll need and the income you’ll have, you have several options. For example, might you be able to save more? Once you reach age 50, federal law allows you to start contributing higher amounts to your workplace retirement plan and IRA. In 2024, you can contribute an extra $7,500 on top of the regular $23,000 limit that applies to a workplace plan. Also, you can contribute an additional $1,000 on top of the regular $7,000 limit that applies to an IRA.

Among your other options, you might decide to delay your retirement. Or maybe you’ll elect to retire on schedule but work part-time for at least the first few years. Another idea is to scale back the retirement lifestyle on which you’ve had your sights. See if one or a combination of these modifications in your planning will work for you.

Revisit your asset allocation. To reduce risk, you may wish to move some of your assets into more conservative investments. But remember that your nest egg will have to last the rest of your life – and to stay ahead of inflation, you will generally need to be invested for some long-term growth, as well as income.

Start planning your retirement income. If your workplace plan offers a choice on how to receive your plan balance at retirement, get to know your options. Also, get projections for your Social Security retirement benefit and any pension benefits you expect to receive. You want to create a strategy for turning your nest egg into income that you won’t outlive.

EY Navigate can help

Your EY Navigate website and app feature many resources to help you plan your financial future. For more personalized guidance, call your EY Navigate financial planner.