Retirement: A Modern Spin for the Next Generation
Student loan debt, stagnant wages, historically high inflation and home prices, the demise of pension plans, and the uncertain future of the Social Security system make many young Americans question if they will ever be able to retire at all. In addition, social and cultural norms are in a constant state of evolution, disrupting many previously successful approaches to financial planning. As a result, customized accumulation planning for retirement may be more important than ever, despite factors that may be outside of our control.
“Financial Independence” or “Work Optional”
Using the word “retirement” can make this period seem far away and difficult to visualize, which can lead younger people to think it is not worth planning for right now, despite higher budgets required for retirement. Framing the retirement goal as “financial independence” or “work optional” can help motivate clients and prospects to potentially take quicker action so that they can meet these goals and work towards the future lifestyle they desire.
Lifestyle Creep
Lifestyle creep occurs when an individual’s standard of living goes up as their income goes up. Both mitigating lifestyle creep and increasing one’s savings rate over time are factors that clients have control over and can only help provide more flexibility down the road. An ongoing planning process with next generation clients can capture additional cash flow (raises, job changes, etc.) before lifestyle creep occurs, increase the likelihood of reaching goals sooner, and build a buffer for unexpected scenarios, such as layoffs or health issues.
Tax Diversification
Tax diversification is another area over which we have control. The choice of Pre-Tax or Roth contributions within 401(k) plans creates opportunities for diversification among tax treatments as well as tax-free compounding throughout a career. This can be a more proactive and optimal approach than clients reaching retirement with all their money in their Pre-Tax 401(k), then having to decide at that time if there should be any Roth conversions (potentially subject to higher tax rates, with fewer years to benefit from tax-free growth). Saving into a Taxable Account can provide additional tax diversification and help fund an early retirement before penalty-free IRA withdrawals and income sources such as Social Security.
By starting early, and through the long-term effects of compounding, you have the potential to make the biggest impact now versus waiting until closer to the “retirement event” when assets have traditionally become available to manage. Most of the next generation do not remain with the same employer their entire career and many will rely on investments for their future retirement income. All of these factors indicate a need for dynamic financial plans to accommodate these lifestyle changes and future income needs.
Vicus Capital is neither a law firm nor a certified public accounting firm and no portion of the content should be construed as offering or disseminating specific legal or accounting/tax advice.
For Use with the General Public. Financial Planning and Advisory Services offered through Vicus Capital, Inc., a federally Registered Investment Advisor.
