Opinion: How millennials can take charge of their post-COVID financial future
Since the start of the COVID-19 pandemic, more and more Americans have realized the importance of a financial plan. But developing and sticking to a financial plan can seem overwhelming, especially when faced with a major economic event that creates financial problems.
Millennials – born between 1981 and 1996 – have been hit hard. This segment of the population became the largest generation of the full-time workforce in the United States in early 2019, according to the US Labor Force Statistics Current Population Survey. They struggled during the pandemic – trying job losses and reduced wages.
These financial shocks have led many millennials to make difficult financial decisions. A recent study in Financial planning review, the CFP Board Center for Financial Planning’s peer-reviewed academic journal, found that Millennials between the ages of 30 and 39 were the most likely to take a hardship withdrawal or loan from their employer-sponsored retirement plan, compared to other age groups. While the CARES Act has made it easier to use a retirement account, for example by waiving penalties for early withdrawals from 401 (k) accounts and IRAs, reduced retirement savings could affect future income in retirement. .
As millennials face the challenge of balancing short-term and long-term needs, it begs the question: What can millennials do to strengthen financial security? Develop a financial plan. If a financial advisor is assisting you in developing a financial plan, there are three key things to keep in mind:
1. Emergency savings: One of the many lessons of the pandemic is the value of being prepared for situations that require unforeseen expenses. For many people who go through unforeseen life changes, such as the loss of a job, a backup fund to help with rent, utilities, and other basic expenses can be a blessing during tough times.
While savings do not necessarily replace the financial security of a stable income, an emergency fund can mitigate the short-term impact of disruptions. To prepare for unexpected expenses, an emergency savings fund should remain a priority, even when your financial situation improves.
2. Diversification: In the first half of 2020, stock markets hit all-time highs and lows due to volatility brought on by the pandemic. To help amortize and maintain your nest egg during important economic events, a diversified investment strategy is preferable. Not only is it important to diversify your investment portfolio, it is also important to diversify your tax strategy and even your source of income, if possible.
Tax diversification (a mix of tax-deferred, non-taxable, and taxable accounts) can help mitigate the impact of taxes on your future retirement income while creating flexibility to better control your tax bill as you dip into your income. retirement savings.
Meanwhile, creating different sources of income, such as additional income through self-employment, can create an additional safety net in the event of significant changes in your employment situation.
3. Estate planning: Due to their age, many millennials don’t see estate planning as a priority. Yet COVID-19 underscores the importance of estate planning – regardless of your wealth or age – to ensure that your loved ones will have adequate protection.
In fact, now might be the best time to explore creating a will or trust, appointing guardians for dependents, and taking inventory of assets. Insurance coverage also provides protection in extenuating circumstances. Understanding the options available, such as life insurance and long-term care, can help prepare for the future financial impact of changes in health status.
Rachel L. Sheedy CFP® is Head of the Financial Planning Knowledge Center, CFP Board Center for Financial Planning.
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