Personal Finance in Your Middle Years
At 32, I have a wife, a house, a family, a track record in my career, a credit history — all things that were a distant dream just 10 years ago.
For those of us in our “middle years,” this is an important time in our lives. We are hitting our stride in our careers, we’ve settled down with a spouse and a house, and maybe started a family. Things that were once remote possibilities are starting to take a more concrete form.
No longer just starting out in life, we need to start thinking differently about our financial lives.
Thinking in Terms of SMART Goals
The middle years are when our financial dreams should transform into SMART goals – our financial goals need to become Specific, Measurable, Attainable, Realistic, and Timely.
I didn’t worry about college planning when I was younger, because it’s hard to make college plans for unborn children. Now, I have a two year old, and I know (more or less) when he’s going to college. Things are now much more real, and I have a deadline to work against. This holds true for other areas of our lives. Whether we are talking about our profession, college, retirement, or estate planning, we should make our goals SMART ones.
Knowing Our Employee Benefits
In the middle years, it’s important to take an in-depth look at the benefits available to you at work. That means knowing what they are, the details of how they work, and where you might need to supplement. Employers often provide a great starter platform that provides basic protection in a couple of different areas – life, disability, and health insurance – but they may not be enough for all needs.
Life insurance. Many employers offer group life insurance to employees. It is often on the order of one or two times the employee’s salary, up to a certain amount. The cost of any insurance over $50,000 is considered a taxable benefit, so many employers only offer $50,000. While this is a nice benefit, there are any number of reasons why employer-provided life insurance is not enough.
When you are young and single, one to two times your salary might seem like a lot of money to cover your final expenses, but when you have a family depending on you, your economic replacement value is many times more than that. Take a salary of $75,000 over the next 20 years, and suddenly your family is facing a loss of $1.5 million or more in potential income. Without your income, their lives may change dramatically. Can they continue to afford the mortgage? Is college still possible?
You can often buy extra life insurance coverage from your employer, but because such group plans also cover smokers and older employees, a younger employee might get more coverage for less money by getting life insurance coverage elsewhere.
Disability insurance. Your most valuable asset through your working years is not your home, car, or even your 401(k). It is your ability to earn an income. There’s a 25 percent probability that you will suffer a period of long-term disability before the age of 65. Many employers offer disability coverage to their employees, but few people ever look into the details.
- How much of your income is covered? A policy that replaces 60 percent of your income is generous.
- What is the definition of a “disability?” Some policies consider you disabled if you can no longer work in your current profession, while others only declare you disabled if you can’t work at any If you could hold a job as a greeter, you won’t get disability.
- If the employer pays for the long-term disability protection, the benefits are considered taxable by the IRS.
- If you leave your employer to, for example, start your own business, you no longer have disability coverage.
For all these reasons, many people consider getting their own long-term disability insurance.
Health Savings Accounts (HSAs). One great benefit that people often overlook is maximizing their contributions to their Health Savings Account, or HSA. These are a relatively new option, where people who have a High Deductible Health Plan (HDHP) can put money aside to pay for healthcare expenses. Unlike the older Flexible Spending Accounts (FSAs), the money doesn’t have to be spent during the current year. Instead, anything that isn’t spent continues to accumulate and can be invested. An HSA is the only triple tax advantage account in the marketplace — the money goes in tax deductible, it grows tax deferred, and when it’s used for qualified healthcare expenses, it comes out tax free. If you use it properly, you never pay taxes on the account.
Any excess in the account compounds tax free and, when you turn age 65, if you don’t want to use it for healthcare expenses, you can use it like a traditional IRA. All you have to do is pay ordinary income tax on anything you take out for non-healthcare expenses.
Put an Estate Plan in Place
With the exemptions for Federal estate tax now increased to $11,180,000, many people wonder if estate planning is still necessary. Estate planning isn’t just about the Federal estate tax, you don’t need Rockefeller money to benefit from it, and it is easy to make a mistake that will cause endless problems. State taxes can be an issue in some locations, but there are a lot of legal issues that need to be addressed. If you have children, guardianship and trusts are important parts of your estate planning. Who do you want to take care of your children if both you and your spouse are gone? Do your children get their inheritance and life insurance right away, or is it held in trust for them until they reach a certain age? If you die without a Will, you are considered intestate and the inheritance of your estate is governed by the laws of your state rather than your wishes. Some of the rules governing intestate inheritance are pretty strange, and they might not match your wishes.
Then there are other issues like power of attorney and advanced medical directives. I know it’s hard to deal with some of these questions, but a little thought now will make it much easier for your loved ones if a crisis happens.