WSJ Blogs

Real-time commentary and analysis from The Wall Street Journal
Wealth Manager

Voices: Rand Spero, on Helping Young Clients Prioritize Savings

Rand Spero

Voices is an occasional column that allows wealth managers to address issues of interest to the advisory community. Rand Spero is a financial planner and president of Street Smart Financial in Lexington, Mass.

One of the issues that I’m concerned about is young adults, even those in thriving professions, who are overwhelmed by their financial options. They are told by financial professionals and the media about all the different financial “buckets” that they should fill–housing, emergency funds, 401(k), insurance, students loans, 529 plans–and they don’t know where to start.

A lot of advisers can be cavalier when telling people the things they should do, but they need to be more empathetic to the challenges facing young adults. They need to talk to them about what to do when they have too many financial demands and not enough assets to meet them all.

Often the media and financial advisers will focus on one bucket at a time and explain why it’s crucial to fill that bucket–a 529 plan, for example. But then another adviser will say that retirement is the bucket you should focus on. This can get overwhelming.

There’s no doubt that filling each one of these buckets has its advantages, but what’s important is showing clients how to prioritize if they don’t have the funds to fill them all. Don’t set the bar so high that no one can realistically reach it. Rather show clients that not every bucket can or needs to be filled now.

I see there are three problems with focusing on too many buckets: potentially filling the wrong bucket first, becoming overwhelmed and therefore doing nothing, and potentially purchasing a financial product without considering whether it’s truly a priority. To avoid these problems, advisers need to help clients come up with a systematic plan for saving.

First help clients prioritize their goals and determine how much is needed for the buckets that are most important to them. Make sure they understand that there are tradeoffs. For example, they might have to put off buying a home to save for retirement. Don’t commit funds to any bucket until the clients understand the big picture.

Set up a timeline that shows the clients’ savings priorities, but make it clear that they can increase contributions to other buckets at any time as their financial situation changes. So it’s not all or nothing.

Advisers need to explain the ramifications of filling any of these buckets because there can be some costs associated with certain savings goals, such as savings vehicles that have a withdrawal penalty.

Advisers also need to be encouraging because the current economic environment is challenging for young adults. They should be supportive and realistic about helping clients reach achievable goals. I think it would behoove advisers to try to place themselves in the role of the young adult clients. They are facing some difficult choices and advisers should understand those challenges and help them prioritize which one to tackle first.

Add a Comment


Comments (1 of 1)

View all Comments »
    • Young adults starting their careers do have a lot of competing voices for their new earnings, but a couple of guidelines aren't that hard to embrace: The first rule of financial life is to live beneath your means. Their savings goals as they begin their careers are:

      1. Fund your 401K to the point where you obtain the employer match (also known as free money).

      2. Fund a Roth IRA to the max each year. If you need the money later for grad school or a house down payment, that's not a bad use of the initial funds you set aside. The IRS says that money withdrawn from a Roth comes out of contributions first, so there is no tax impact, avoid withdrawing any earnings, which triggers penalty rates. So a 22-year old who sets aside $5500 per year until age 30 has created a habit of saving, has done so in a nontaxable manner (except for the earnings), and at age 30 has $44,000 to hopefully leave alone as a cornerstone of retirement savings, but if needed can get to it. If the young person is financially successful in their career, they will likely earn beyond the limit for Roth IRA contribution eligibility, hence the importance of contributing to this in the early years of the career.

      If possible, both sets of money (401K and Roth IRA) should be left alone to grow. If needed, access the contributions only from the Roth IRA. Many companies allow a 401K loan of up to half the balance or $50,000 at most, and allow a standard 5-year payback, or 15-year if used for the purchase of a primary residence. If payments are not made as agreed, the amount becomes taxable and possibly subject to penalties, although some plans allow the loan recipient to just continue making the monthly agreed payments until the loan is fully repaid.

      3. Emergency funds: At first, this may be merely an empty credit card. Build up an eventual amount equal to six months of living expenses.

      4. Make your student loan payments on time. If you can't afford the amount for a 10-year paback, cut some discretionary spending to make room for the 10-year repayment plan. You don't need expensive coffee or dinners out, or a bigger place to live than necessary. Get a roommate or two, avoid car purchase, and keep paying down your loans. Live close to where you work and use public transportation. When your student loans are gone, start saving for a downpayment on a house or condo, but don't automatically buy either if your job plans may cause a move.

      During senior year of college, you spent xx dollars on fun, eating out, entertainment. Try to go a year with a similar amount of spending while you save everything else you can. If you got a good job, you may be able to double the previous entertainment budget from college, and still make all savings goals.

      Don't buy stuff you don't need. Keep your vacations cheap. Live by transit. Live small. Gradually upgrade your lifestyle after you have made your investments in savings.

About Financial Adviser


    • Wealth Manager on Facebook