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Video Transcript

I’m here today to talk about financial planning when you’re in your mid-career stage, basically, those of us in our mid 30’s to mid 50’s. Workers in this stage are typically in their peak earning years and are juggling the demands of supporting their household while also trying to build up enough wealth for retirement. The easiest way to start building wealth in this stage is to take full advantage of retirement savings vehicles, and the plan really should be to frontload your savings as much as possible and not plan to play “catch-up” later. It’s not gonna happen —spending habits/savings habits, those don’t just change overnight. In terms of prioritization – I’ve got clients who often say, there’s so many options, I’ve got limited funds, how do I know which one to contribute to first.

The way I think about it is if you’re working and your company offers a match, you have to contribute enough to access that match. It’s free money…we all know there’s not a lot of chances for free money in the financial world. Then, contribute to your HSA, which happens to be triple tax advantaged. There’s no minimum age for HSA fund distributions, so when you need to spend money on health care, it’s available. But a much better strategy is to not use those funds for current medical expenses. Instead, invest them, leave them alone, and use your HSA as another long-term tax-free growth vehicle.

Next you want to max out your 401(k). If you still have excess cash flow, I strongly encourage what’s called a mega backdoor Roth. This is something that’s only available if your company’s plan has some specific features and it involves making after-tax contributions to your 401(k), and then converting those contributions to a Roth. Normally the government says, hey, you make too much money, you can’t contribute to a Roth. By using this strategy we’re not hampered by that income limitation.

And while saving for retirement is great, you don’t just want to save, you want to invest. The power of compounding over long time periods, it’s extremely powerful. How powerful… there’s a story that when Einstein was asked what mankind’s greatest invention was…he said: compound interest. In terms of investing, you want to make sure you have the right asset allocation for you. It’s going to vary based on your goals, your objectives, your risk tolerance, your time horizon… it’s completely specific to you. But the overarching goal is that you want to invest in a way that you’re going to stay invested regardless of how the market does. If you were aggressively selling stocks because of how the market performed, your asset allocation was probably off.

At this stage of our career, if we haven’t already, we also need to address our basic estate planning, regardless of net worth. We recommend you at least have your core estate planning documents in place. These documents identify who will make financial and health care decisions if you’re not able, they name guardians for your minor children, and they allow you, rather than the state, to decide who inherits your assets. And remember, these documents, they can be changed at any time, for any reason, So my advice, don't overthink it. Don’t try to make it perfect. Just focus on getting them done.

I could spend an hour talking about tax planning ideas but I just want to touch on one you might not be aware of: Roth IRAs for children. The idea is for the parent is to set up and fund a Roth IRA for a working child. I talked earlier about that power of compounding. Even doing a couple year’s of Roth contributions on a child’s behalf, and leaving those assets alone for decades. $10/$15 thousand of contributions could be worth several hundred thousand dollars in 4 or 5 decades if it’s invested. And it’s also a way to teach your kids, at a young age, about the importance of saving, investing and compounding. Things that are gonna pay big dividends for them down the road.

Last topic I want to touch on is education planning. In terms of the best way to save for our kids’ college, I have a strong preference for 529 plans, mostly because of their tax benefits. They offer tax free growth and, there’s often an upfront tax deduction for contributions into the plan, but I also like them because they offer a ton of flexibility. I can change the beneficiary. In a worst case scenario, I can take the money back from the 529 plan, and I now have the ability to transfer unused 529 plan assets into a Roth IRA for that child, so a ton of flexibility there.

And if you haven’t already, now is the time to have a financial plan check-in with your William Blair advisor. We can help you get your arms around your current financial situation and make sure you’re on track to meet your long-term goals. I want to thank everyone for listening and hope this was informative.