Dr. Lamar Barden, MSFS, AEP, RFC, LUTCF ■ Ande Frazier CFP®, CLU, ChFC, RICP, ChSNC, CDFA®
500 East 2nd Street, Rome, GA 30161-3112 ■ 706-234-7468 ■ www.clocktowerwealthmanagement.com
Responsible money management is often a foreign concept to teens that is complicated and confusing. Yet, if they learn how to save and be financially responsible early, they can protect themselves in the future. To empower teens to get the best start possible, here’s a closer look at how to explain financial responsibility to them and four key strategies they can start practicing right now.
What does it mean to be financially responsible?
Being financially responsible means you have a process for managing your money that is productive and in your best interest overall. A cornerstone of financial responsibility is saving to protect yourself and the things you have. Here’s a look at a few other behaviors of a financially responsible person that you can share with your teen:
- Understands their costs and income, budgeting to ensure all their expenses are covered
- Saves money for the unexpected costs that will pop up sooner or later along with future items and experiences
- Has a healthy attitude toward money, taking a long-term view and living within their means
- Pay bills on time
- Manages credit responsibly and looks for ways to cut costs
- Shops around when making any financial decision to ensure they are getting the most value on expenses
- Pursues proactive financial education, both understanding basic financial concepts and financial products
- Has a written strategy, often created by working with a financial professional
Be sure to explain how financial responsibility results in less stress. On the other hand, explain how someone who is not financially responsible wings it. They may not make sure they will have enough money for their living expenses, may not save, and might need help covering their basic needs, especially when emergencies come up.
How to practice financial responsibility as a teen
To help your teen develop their financial responsibility, here are four key strategies you can share:
- Start saving: It’s never too early to start saving and protecting your future. When your teen receives money for their birthday, from a holiday, or something else, have them set aside and save percentage (at least 10% to 20%) every time.
- Understand the cost of living: Talk with them about the household bills and divide them by the number of people in the family to see how much they would be responsible for. This exercise will help them understand what it takes to cover their basic necessities when they go out on their own.
- Track spending: It’s essential to understand where your money goes. Have your teen keep track of how much money they receive, how much money they spend, and what they spend it on. They may be surprised by how all the little purchases add up. Review together and guide them to consider if it is the best use of their money.
- Educate: Help them to learn how credit, interest, and investments work. By educating your teen, they will be able to make better decisions like managing their credit well, having a good credit score, and getting better interest rates, insurance rates, rental terms, etc.
Financial responsibility is something you can learn early on. If your kids can start as early as their teens, they will be ahead of the game and it can pay off later
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In recent years, a new personal finance concept has caught FIRE: Financial Independence, Retire Early.1 Some young professionals embrace the FIRE movement, working to save at least 50 percent of their income in a bid to live frugally now and retire while young. The theory goes that the savings, amplified by investing, will quickly accumulate to be enough money to retire by age 40.
As an idea, FIRE is intriguing, and saving for the future is always a good plan. But there’s more to it than that. Many of the people who advocate FIRE have six-figure salaries, don’t have dependents and have a low cost of living. In addition, the plan does not address disability, accidents or illnesses, which can easily disrupt best-laid plans. Further, there is an inflation concern that gets skipped over: If your retirement lasts 50 or more years, which it easily could if you retire at 40, your purchasing power could be cut in half—twice—over that time period.
AN ALTERNATIVE STRATEGY
Another method seeks to protect yourself today, while saving for tomorrow. This can be implemented in place of FIRE or be a complement to it, depending on your personal preferences.
PROTECT YOUR TODAYS
Just imagine for a moment: What would happen if you were too ill to work? It’s not far-fetched. One out of four young workers will have to put work (and earning) on hold due to an illness or accident at some point in their career. Often this kind of income interruption drains savings accounts or drives people into debt to cover basic expenses. A disability income insurance policy can help to keep a portion of your income flowing in the event of an injury or illness. This can help you to stay focused on getting better and keep up with expenses. Similarly, whole life insurance can give families financial protection if an income earner dies unexpectedly.
BECOME A WORLD CLASS SAVER
As we’ve said from the start, it’s important to save for the future. But a 50 percent savings rate is extreme and simply not achievable for most people. Many financial experts recommend saving 20 percent of your income.2 That’s because saving for the future should be a sustainable, lifelong habit. The immediate goal is to have a year’s worth of expenses in your savings account. Once you have this kind of financial cushion in place, you can weather the unexpected without accruing debt through credit cards or unsecured loans.
PAY DOWN DEBT
Many people get caught in a debt cycle and are motivated to pay it all off as fast as possible. This is a good thing to do, certainly, but not at the expense of protection. Think about it. You could pay down every last cent one day, and be unable to work the next, because of an unexpected event. Then, you’re quickly back where you started.
Certainly, one of the great things about the FIRE movement is that people are really talking about ways to live within their means and save. However, there may be a better way to live today without sacrificing your tomorrows, that can also lead to greater overall financial and emotional confidence for the rest of your life.
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1 Here’s Why You Shouldn’t Retire Super Early, Marketwatch, March 31, 2019
2 Personal Savings Statistics, Guardian Life
Some prepare for retirement by planning extended vacations or travel. Others meet with trusted professionals with increasing frequency. Some simply adopt new hobbies to fill their time. While you’re exploring the new opportunities the next phase in your life offers, these shocking facts add a healthy dose of reality to your retirement planning.
- The retiring population is bigger than ever before.
As Baby Boomers near retirement, it’s no secret that the sheer size of this generation will have a compound effect on Social Security and healthcare programs. In 2000, adults aged 65+ represented 12.4% of the population; according to the U.S. Department of Health and Human Services Administration on Aging, that number is expected to grow to 19% by 2030. The number of Americans aged 45-64 who will reach the typical retirement age of 65 in the next two decades increased by 31% over the past ten years.
The vast size of this population and the questionable stability of government programs underscore the importance of building a strong and independent financial position as you near your golden years.
- More than one-third of retirees rely on Social Security nearly exclusively for income.
As reported by the Social Security Administration, for 23% of married retirees and 46% of unmarried retirees who receive Social Security benefits, it constitutes 90% or more of their income. Where are you positioned to be upon retirement age? Will you be among the two-thirds of Americans who have multiple sources of retirement income, or will you rely heavily on government support?
- Your retiring peers are more likely to be in poverty than the general population.
In 2011, the U.S. Census Bureau released a Supplemental Poverty Measure (SPM) which revealed the poverty level for older adults (persons 65 years or older) is just under 75% higher than the general population (15.1% versus 8.7%). The SPM takes into account living costs, non-cash benefits received and non-discretionary expenditures. Out-of-pocket medical expenses are the primary driver for poverty among older Americans, and they often pass that burden along to their families.
- Your life expectancy may be greater than your caregiver’s.
Americans can’t outrun obesity and chronic illness much longer. The American Heart Association reports that obesity rates are now triple the rate in 1963. Surgeon General Richard Carmona notes, “We may see the first generation that will be less healthy and have a shorter life expectancy than their parents.” Are you prepared to fund your own care, should your children not be able to provide support?
- Retirement may be detrimental to your health.
Retirement offers the promise of relaxation, but in reality, it delivers challenges to both physical and mental health. Studies on retirement performed by the National Bureau of Economic Research revealed that complete retirement leads to a 5-16% increase in difficulties associated with mobility and daily activities, a 5-6% increase in illness conditions, and a 6-9% decline in mental health. These changes take place over an average period of 6 years. Your career required some degree of daily physical activity, and it’s critical to maintain that level of activity, or to add to it, throughout retirement.
- You may be alone in retirement.
The Administration on Aging reports 47% of women aged 75 and older live alone. The story is less lonesome for males; older men are much more likely to be married than older women – 72% versus 42%. As you plan for retirement, take note of how much you’re able to care for yourself.
- You may not be alone in retirement.
Many retirees are disillusioned when they find they still have significant family responsibilities in retirement. The Administration on Aging reports nearly half a million grandparents aged 65 or more have the primary responsibility for their grandchildren who lived with them. The Administration on Aging also reports that crowded housing conditions are challenging for retirees who have their adult children or grandchildren living in the home.
- Your standard of living will change.
Retirees are often prepared for a change in income level, but may not be prepared to scale their lifestyle and living arrangements accordingly. Housing, in particular, is a burden to 40% of older Americans as their expenditures on housing and utilities exceed 30% of household income, as reported by The Administration on Aging.
- You may outlive your retirement portfolio.
The average retiree can expect to spend nearly two decades in retirement. The Administration on Aging reports that adults aged 65 have an average life expectancy of an additional 19.2 years; 20.4 years for females and 17.8 years for males. A healthcare study by the Journal of General Internal Medicine noted that end-of-life medical expenses (in the last 5 years of life) range from $38,000 to over $100,000 depending on individual needs and the level of care provided. Is your portfolio structured to provide reasonable living income now and to cover growing medical costs in later years?
- Retirement portfolios aren’t keeping pace with increasing life expectancy.
The Administration on Aging also reports that today nearly one in five Americans aged 65 and older are in the labor force; about 7.7 million Americans aged 65 and over are working or actively seeking work (The rates for both men and women have been steadily increasing since the year 2000.) The majority of these Americans are working because they have to; they simply haven’t saved enough for retirement. As pension plans continue to disappear, the Federal Reserve estimates that the average amount saved through a 401(k) plan is approximately $100,000. This amount is far from enough to secure a reasonable retirement and to plan for housing, healthcare and related costs.
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Owning a small business is a dream for millions of Americans. Starting a business is exciting. It is also a huge commitment that comes with a unique set of challenges, including planning for the unknown. Did you know that whole life insurance can be a pivotal part of this strategy?
Traditional whole life insurance is commonly known for the important core value of protection coverage it can provide for a policyowner’s family. It can also play a role in helping to protect the owner’s business too. While there are benefits that come along with being a small business owner, the flip side is that you potentially might not have access to certain retirement plans, an employer-sponsored life insurance and even sick pay, like you would if working for a large employer. Whole life insurance may be able to solve for these and some other challenges that business owners face.
One key difference between a whole life insurance policy and some other types of insurance, like term life, is its guaranteed cash value component.1 As premium payments are made into a policy, the cash value will grow2, tax deferred.3 One advantage of the cash value is that a policyowner can make a withdrawal in the event of an emergency or any other unknown issue that a small business owner may face.4
Here are some examples of expenses that may be covered by applying a cash value withdrawal.
- Rent: In an average year, rent can be a big expenditure for many small business owners. Access to cash value may help offset or cover rent if your business needs to close for illness or any other reason for a brief time.
- Sick time: When you’re feeling under the weather, there are days when you just can’t or shouldn’t push through it and you’ll need to take an unpaid day off. Access to cash value can help cover bills and expenses, especially if one sick day turns into many days off.
- Disaster Preparedness: Natural disasters cause billions in damages and lost business revenue each year. While business insurance often covers many costs associated with disasters, there can often be gaps. Cash value from a whole life policy may help offset some lost revenue, or to cover repairs.
- Cash Flow: Cash is the lifeblood of your business. Yet, cash flow slowdowns are inevitable in any business, so there may be times when you’ll need extra cash to tide you over. Having access to funds can help if bills need to be paid during one of these times.
Another bonus of the cash value is its accessibility. The cash value from a whole life policy can be readily available and may not face any penalties when accessed. A whole life policy can be a part of your business’ strategy for preparedness and growth, as well as protecting you and your family.
Discuss your preparedness strategy today with your financial professional.
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1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
3 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
Social Security Administration (Social Security Basic Facts) Administration on Aging: A Profile of Older Americans – Highlights, A Profile of Older Americans – Employment, and A Profile of Older Americans – Living Arrangements. Federal Interagency Forum on Aging-Related Statistics The National Bureau of Economic Research American Heart Association Icahn School of Medicine at Mount Sinai Meyerson, H. (2013, March 6). Steering America toward a more secure retirement. The Washington Post. www.washingtonpost.com. DISCLAIMERS: This material is intended for general public use to potentially assist you in planning for your future. By providing this material, Guardian/Park Avenue Securities is not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Guardian and its affiliates, subsidiaries, employees, agents, and outside contributors, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Individual situations can vary; please contact a financial professional, your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.