The One Goal & One Risk You Can't Ignore

As a millennial managing your finances, it can be challenging to know where to begin. With so many financial goals vying for attention, it's tempting to prioritize short-term and exciting ones like buying a home, starting a business, taking a sabbatical, or saving for your children's education. However, there's one goal and one risk that demand your immediate attention. Prioritize retirement savings and safeguarding your income. By starting early, you can ensure success in these two critical areas. Let's explore how to get started.

Goal: Retirement

You're already aware of the importance of saving for retirement, so I won't dwell on that. Instead, let's discuss how you can effortlessly set yourself up for retirement success and resume enjoying your money.

I recommend my clients strive for a savings rate of 20%, with 10% allocated to retirement accounts. If you have a 401k (or another employer plan) with a company match, reaching 10% is quite attainable. The most common 401k match is 3%, so you only need to contribute an additional 7% to achieve the 10% goal. Here are a few ways to save that 7%.

First, make sure you contribute at least 3% to your 401k to maximize the match. Some companies offer more substantial matches, so take full advantage of that opportunity.

Next, decide where to allocate the remaining 4% of your contributions. In our example, you already contribute 3% to your 401k, with a 3% match (totaling 6% contribution). To cover the remaining 4%, consider adding it to your 401k or explore other accounts that offer added flexibility. One account to consider is a Roth IRA, although be aware of income and contribution limits. Another option is a Health Savings Account (HSA), which may sound unconventional, but it provides numerous tax benefits and you can invest HSA funds and use them similarly to a retirement account.

That's it—simple and straightforward. It's advisable to review your situation and perhaps consult a financial advisor, but by ticking off these boxes, you're on track for a comfortable retirement. Now let's address the risk.

Risk: Loss of Income

Think of your retirement funds as a fortified castle. When mitigating risk, we construct a moat and protective walls around that castle. To maximize the potential of compounding growth in your retirement accounts, it's crucial to leave them untouched. Our objective is to position ourselves (and our loved ones) in a way that avoids tapping into those funds in case of income loss. Here are three potential income loss scenarios and how to safeguard against them.

• Disability: Many millennials overlook this risk, but it's significant. There's a real chance of becoming disabled and being unable to work or earn the same income. Depending on whom you ask, the likelihood of disability before retirement is around 25-35%. Given the financial impact, it's too big to ignore. Fortunately, insuring against disability is straightforward. You need a disability insurance policy that covers your own occupation and pays at least 60% of your income if you become unable to work.

• ‍Unemployment: You're likely aware of the importance of an emergency fund. It's an essential component not to be overlooked. Set aside 3-6 months' worth of expenses in a separate account designated as your "Emergency Fund." While people may dip into their emergency fund for various reasons, its primary purpose is to provide a financial cushion when you lose your job unexpectedly. Even if you don't anticipate being fired or leaving your job without a plan, it's crucial to prepare for such possibilities. Create the account and leave it be.‍‍

• ‍Death: Yikes! I know, it's not pleasant to contemplate the possibility of premature death, but it's a reality. We can't predict how much time we have. The financial risk associated with dying prematurely is leaving your loved ones without the protective moat and walls around the financial castle. If someone, such as a partner, spouse, or child, depends on your income, life insurance is a must. It's emotionally challenging for your family to cope with your passing—don't compound their burden by adding a financial strain. The most effective way to insure against this risk is with a term life insurance policy. As a millennial, you can obtain one at an affordable price. While everyone's situation differs, a general rule of thumb is to secure a policy worth 10 times your income, covering you until retirement age.

I understand that these financial aspects aren't the most exciting or glamorous. However, they address a fundamental emotional need—security. By ensuring a 10% income allocation to retirement accounts, obtaining the right disability insurance policy, building an emergency fund, and acquiring a straightforward term life insurance policy, you can find peace of mind knowing you and your family are protected. After checking these boxes, you can allocate the remainder of your funds towards vacations, dining out, and anything else that brings you joy. The key is to start now. Go for it!

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