Wealth Planning Advice for Each Decade of Life

As longtime wealth advisors, we’ve seen this first-hand: The benefits of good financial decisions tend to compound over time, creating a lifetime advantage. Based on our work with multiple generations within families, we thought it would be useful to offer some key advice for each decade of life.

Each situation is different, of course, and much of our advice applies at any age. So our suggestions are a starting point. They are meant to launch conversations, especially with the younger people in your family, about where they are now and where they would like to be years from now. We can then advise you and them on the best way to get there.

Twenties – Get the Early Bird Advantage

Open a Roth IRA, which lets you leverage youth and a lower tax bracket. The beauty of a Roth is that it inhabits a tax-free zone, even on withdrawals, starting at age 59 ½. And it is flexible. At any age, you can withdraw the principal tax-free to pay for college/grad school, and up to $10,000 for a first-home down payment. And at most income levels, you can contribute to a Roth and your company’s pension plan.

Strive for a stellar credit score. A high credit score saves you money each month on interest payments (see chart below), money you can save and invest. Paying off credit card balances every month is also a great way to control spending.

Mind the Gender Pay Gap. Women tend to earn less than men for comparable work, with estimates ranging from 5% to 20% less, depending on the dataset. Over a lifetime, even 5% can add up to a tidy sum. As young people enter the workforce, we encourage them — especially women — to research average compensation for their field at the local level (including stock options if applicable) and to gain confidence in negotiating a salary.

Thirties – Start Aligning Finances with Values

Make financial decisions in context of who YOU are. Just because you qualify for a hefty mortgage doesn’t mean it’s a good idea. What do you want to do: Start a new business? Travel? Be debt-free by the time the kids are in college? Make your mortgage and other finances suit your personality and life choices, not the other way around.

Manage risk. Be wary of having most of your net worth tied up in any one investment, even if it seems “solid,” such as real estate or the company you work for or own. If you have a family, have a will and an estate plan. A good estate plan will transfer assets to your heirs privately, tax-efficiently, and in line with your wishes. If your asset base is not yet accessible (inheritance, equity comp, shares in a startup, etc.) or enough to cover your family’s long-term needs, buy 20-year disability and term insurance in your 30s because it’s then inexpensive.

Be mindful of titling. California, Washington and seven other states are community property states, meaning that all assets acquired during marriage (other than by gift or inheritance) are jointly owned. Keep your pre-marriage and all inherited assets in your name unless you intend to make a gift to your spouse.

Forties – Save Deliberately

Set up and use a “Savings Budget.” This decade is key for ramping up tax-advantaged savings for education, healthcare and retirement. That is, at least, the theory.

In practice, most people do not save methodically in their 30s and 40s for three reasons:

• Pressing new demands, from home renovation to business ventures to private tuition.
• Confusion about how much money to put into which account;
• Unwillingness to lock away money for decades.

This is why a Savings Budget is helpful.

A Savings Budget specifies how much you’ll put into each tax-advantaged account each year, and how much you will keep as easy access regular savings. You want to use (in varying amounts) all the tax-advantaged options you qualify for, balancing out their pros and cons (full taxation of withdrawals, mandatory withdrawals, etc.).

Don’t overlook Health Savings Accounts (HSAs). If you have a high-deductible health insurance plan, take advantage of the option to open an HSA. A 65-year-old couple is likely to need $220,000 for health care in retirement, in addition to expenses covered by Medicare. The HSA can be a great source of tax-free money to pay some of those bills.

Fifties – Strategize and Prioritize

Trace out your retirement income stream. Ideally, you want retirement income to come from a variety of sources – investments, rental income pensions, Social Security, IRAs, part-time work, etc. – whose withdrawal and tax requirements differ. You can then optimize when and how to take payments from each source, while allowing your principal to keep growing over time.