A contributed perspective by Stephan J. Hess, CFP
Editor’s Note: This is another installment of a monthly series of contributed pieces addressing financial matters.
Life is hard enough financially as it is, but sometimes the stars align in such a way as to cause a perfect storm where multiple needs unfortunately occur all at once. Unexpected life events such as a job loss, a personal health crisis, or divorce can certainly cause this, but sometimes it’s just the naturally occurring everyday life events that can do it. An example of one of these naturally occurring alignments takes place between the ages of 45-55. What makes this window of time particularly unique? Start by asking yourself what is typically happening in someone’s life at this point, and what are they likely to be increasingly thinking about? Before we go any further let me first provide a brief warning. Some of you may find this wholly unpleasant, similar to how Ebenezer Scrooge felt when he met the ghost of Christmas future. The good news is that this is also a time when you are likely to be earning the most you ever have and are probably advancing nicely in your career. Hopefully, this is the case because you are going to need it. Well, ok then, let us proceed.
Most of you probably have guessed that college costs are a big part of this alignment – and they are. You knew for 18 years that this day was coming and now it is here. Depending on how many children you had and your commitment to financially support them, this could be just a few years of pain, or it could be spread out over many. Most parents do their best to save a for college, but a majority find themselves underfunded, and some by a lot. Some parents will take on debt or liquidate other important savings buckets to fill the gap, but most will pull what they can from their salaries and extra cash flow. Depending on your budget this may be no problem, but for most people it is no small sum.
If college were the only thing going on at this time it would be a relative cake walk, but the college years usually coincide with another important life phase. This is also when people begin to recognize the shrinking time horizon for accumulating retirement funds and paying off debt. With 15-20 years remaining, this pre-retirement phase is critical for firming up your financial foundation and topping off reserves. Full retirement is no longer as far off in the distance as it once was and compounding alone is no longer going to get you there. People who find themselves behind recognize that the only way to make up this shortfall is to increase their income deferrals to retirement plans and making larger debt payments. Now you are potentially up to three large demands for your cash.
The last natural phenomenon is that people just want nicer and better things at this point. We deserve it right? For those who have been making responsible financial choices all their lives, this behavior can get tiresome. Now that you are finally making a better income it’s time to start treating ourselves to some of life’s finer things. We want nicer cars and homes, nicer vacations, convenient food, relaxation, and fun hobbies. Such lifestyle enhancements unfortunately are also going to be competing for your dollars at this critical point. Now throw in some home repairs, aging parents with needs, and a car replacement or two and you’ve got yourself a full-blown budget crisis. Might as well call this mental crisis as well.
Since suitcases of cash likely won’t fall from the sky and solve all this, you will have no choice but to prioritize your limited resources and make tough choices. Out of all these competing financial needs, what will you fund and what will you not fund? What is going to get addressed today and what is going to be delayed until later? “You can pay me now or pay me later”, is a well-known phrase for a reason. What you choose not to prioritize doesn’t just go away, unfortunately.
Yes, when you finally get past this budget crisis you will have extra funds again, but you will also have a much shorter window to catch back up. Some people can do it, but if you cannot, you will potentially be facing one of two things. Either you are going to have to extend your work horizon to make up for the lost time, or you are going to have to accept a less desirable financial outcome with fewer options. As you might imagine, people don’t like to hear either of these, but what else can you do?
This window of time is never easy for anyone, but it can be mitigated by taking early action and making responsible financial choices in your 20s and 30s. That’s right, the financial sins of your youth will come back to haunt you later. If you can slide through this time gap without significantly harming your progress or significantly delaying your goals, we call that a win. If you are able to meet your college goals and somehow still make decent retirement contributions and pay down debt, then you are a Rockstar.
If you are in the middle of this right now, please know that you are not alone. A majority of people find themselves experiencing this “Crunch.” For those of you who are still younger, be afraid, be very afraid. Any proactive measures that you can take today will help you to navigate this window of time better and keep your sanity. It will be worth it.
Stephan J. Hess, CFP®, is a CERTIFIED FINANCIAL PLANNER Professional and is the owner of Hess Financial in Harrisonburg. Neither he nor his company has any financial relationship with The Citizen or its publishers.