Retirement isn’t first priority when planning for young professionals. That’s OK!
Young professionals are expected to accomplish a lot early in life. You’re beginning to make real money. Time to get sound financial advice to establish a good foundation from someone you trust. The problem is most financial advisors focus primarily on retirement planning. When working with young professionals, I believe this is a mistake. Focusing only on retirement planning with young professionals is a huge missed opportunity. Let me explain:
Where do I start? The top 4 financial priorities of young professionals
With young professionals, we start the financial planning conversation with:
- Debt payoff
- Saving for a home down payment
- Building an emergency fund
- Wealth building (including retirement)
In addition, actively maintaining a budget is essential to establishing a strong financial foundation.
See related: A Fresh Perspective on the Budget
You see the difference? Most financial advisors do not spend time working with clients on the first three financial points. Why? It is likely because there isn’t a product associated with these financial needs. In other words, there is no incentive to talk about debt, home purchase, or emergency fund.
See related: Why Should I Pay a Fee for Financial Advice?
Furthermore, a deep dive into the retirement planning conversation isn’t the best place to begin the financial planning conversation with younger clients. Why? I’d rather clients establish a strong financial foundation first. By taking control of the more immediate and pressing financial priorities early, you’re more likely to establish a solid decision-making process in life to address longer-term goals – including retirement.
See related: Guide to Roth IRAs
Young professionals have different financial priorities than retirees
Don’t get me wrong – planning for retirement is important. But here’s the thing – perhaps the most important thing I can do for a younger client is to listen to his or her goals and concerns. What we frequently hear from young professionals is the following: debt payoff, home down payment savings, establishing an emergency fund, and wealth building. Granted, typically a client won’t meet with us and articulate these four priorities in this way. But after listening carefully, asking many questions, and identifying and prioritizing goals, these are very often the four main points we’re asked to address.
See related: Student Loan Forgiveness
Student loans are often the biggest source of financial stress to educated young professionals. Loan repayments often take a sizeable bite out of your checking account every month. The loan balances for young doctors and attorneys, specifically, can feel daunting. It is hard to see past a six-figure loan statement, especially if your payments aren’t keeping up with accumulating interest. When we discuss loan payoff scenarios with clients, we show them options they can implement immediately. They are often surprised by how quickly their loan can be paid off, often without changing spending habits!
See related: Student Loan Stress: Taking Steps To Live Debt Free
After reviewing the various government student loan payoff options with dozens of clients, we’ve found that the forgiveness options available are often a bad deal. Unless you work for a government institution, the remaining loan balance forgiven after 20-25 years is fully taxable at ordinary income tax rates. In other words, instead of sending monthly payments to your loan servicer, you’ll send checks to the IRS in a tax payment installment plan!
See related: Paying Off Student Loans
In addition, you need to consider the opportunity cost in working for the government versus equivalent employment in private industry. While there are exceptions, more often than not we find that working for a higher-paying private employer makes more financial sense then taking a lower-paying government job promising to forgive your loans.
Home Down payment
See related: Your First Home Purchase
Buying a home can be expensive. It isn’t for everyone, but if done right, buying real property can be a great way to build personal equity. I write elsewhere about getting approved for a mortgage, but ideally you’ll start with a sizeable down payment. Building up a down payment will require a significant commitment of monthly cash flow set aside into a savings account.
See related: How Much House Can I Afford? Part I
The advantages of putting down cash towards a home purchase are many – you can avoid taking out mortgage insurance, you’re investing cash into an asset that often appreciates over time, and you pay significantly less interest over the life of the loan. Plus, the higher your initial down payment, the lower your monthly mortgage payment.
See related: How Much Mortgage Can I Afford? Part II
Unlike those winding down from their working years, your aim as a young professional is primarily wealth building, not wealth preservation. You’re in the accumulation stage of life, and in your mind planning for retirement is secondary. Generally speaking, retirement planning should not be your primary focus now.
It’s important to differentiate retirement planning and wealth building. Retirement planning involves income distribution planning from various sources – social security income, assets in a 401k or IRA, individual brokerage or bank savings accounts, and perhaps rental properties. Wealth building, in our approach, bakes in a bit more flexibility while stressing consistent and substantial deferred gratification – setting aside cash for the future. This cash could be invested in retirement vehicles such as your employer’s 401k/403b or in an IRA. Money could be placed elsewhere; where depends on your goals.
See related: 401k Retirement Plan Basics
Here’s the bottom line: investing for retirement is great, but if the foundation of your financial house is built on sand the whole house is at risk of collapsing. The point is, we would rather you start by creating good money habits. Then you’ll be in a much stronger position to plan well for retirement. Please do not misunderstand: creating good money habits is not the same as having your personal financial house in order. To continue the financial house analogy, you can have a strong foundation below without the need for a house on top at all! So don’t fret if your finances are a mess – the salient point is establishing the foundation below, and having the discipline to build, or rebuild, upon it slowly.
See related: Investing for Millennials
With the competing interests of debt payoff, the purchase of your first home, and wealth-building, what about your emergency fund? Just like it sounds, this is money you keep on hand at the bank which you do not touch unless you have an emergency. There are different degrees of emergencies – you lose your job, your car breaks down and you buy a new one, you pay out-of-pocket for a new fridge because yours stops working, etc.
See related: Your Emergency Fund: What You Need To Know
The emergency fund is there to fund the unexpected, necessary expenses of life when, not if, they happen. The point is you have a rainy-day fund to keep you going, without needing to go into debt. This is typically going to be 3-6 months of bare-bones living expenses, not income. Expect the unexpected.
See related: Financial Planning for Millennials
So where do you start?
Getting in control of your personal finances starts with your cash flow. This is where creating and mainting a working budget is essential. Realistically, you’ll focus heavily on a couple of the priorities mentioned above during a season rather than all of them at once. So don’t get stressed if you can’t do everything at the same time — most cannot. Our advice is different for everyone about where to begin. While the advice is different, here are some of the questions we ask at the beginning of a financial planning relationship:
- How much stress are you in from the debt?
- How soon do you want to be in your own home?
- What investing opportunities do you have through work?
- What big, unanticipated expenses did you have in the last year or two?
Professional advisory hurdles for young professionals
Seeking guidance from a CERTIFIED FINANCIAL PLANNER™ professional is valuable as you establish your financial foundation. The problem is, good financial advisors often have investible asset minimums of $500,000 or more to work with them. Even if your income is strong, you don’t have sufficient assets to meet with these advisors.
See related: What’s it Like Working With A Financial Planner?
More commonly, young professionals have access to financial advisors that do not have investment minimums, but they sell a product. These advisors sell life insurance or annuities, and they often do not follow the fiduciary standard of client care. Ultimately, neither of these models is helpful to young professionals.
CameronDowning is one of a handful of CERTIFIED FINANCIAL PLANNER™ professionals that focuses in working with younger clients with healthy earnings, but with little to no saved assets. Our financial planning approach is not tied to how much money you have to invest now, so we’re here to help!
Jonathan G. Cameron is a CERTIFIED FINANCIAL PLANNER™ professional and co-founder of CameronDowning, a Registered Investment Advisory Firm in Miami, FL. Please connect with us on LinkedIn, Facebook, Instagram, and Twitter. Also, check out the rest of the CameronDowning website, especially our Videos page where we’ve created dozens of short videos answering many of your personal financial questions.