Smart Strategies During Peak Earning Years

When you’re in the midst of your peak earning years, you face a number of decisions about how best to meet your financial obligations now while simultaneously planning for the future.  You may find yourself caught in a mental tug-of-war between focusing on the present or planning for the future.  The good news is that there are specific actions you can take that will set you up to take full advantage of your wealth creation as you progress through your peak earning years.

You’ll discover that there are additional opportunities to save for retirement, but then wonder what happens if you get injured and aren’t able to work anymore?  And you may find yourself considering what plans you should have in place if something did happen to you unexpectedly, so your financial wishes would be carried out.

By the time you reach your mid-40s and hear the phrase “managing investments”, it conjures up all sorts of images in your mind.  You no doubt think about how to get the greatest return on your investment, and that’s certainly part of it.  But just as important (especially as retirement draws closer) is protecting yourself and your investments in case something happens to you.  You reach a point in life where “managing investments” means both accumulating and preserving wealth.  While there are steps you can take now to continue to grow your investments, there are also ways to help make sure that an unforeseen occurrence doesn’t rob you and your family of everything you’ve done up to this point.

 

Retirement Catch-up Contributions

It’s possible that when you reach your peak earning years, you may not have been able to save as much for retirement as you would have liked.  Don’t panic, because there are some additional options for retirement savings once you reach a certain age.

While the standard 401(k) contribution limit for 2024 is $23,000 for employee contributions, and $69,000 for the combined employee and employer contributions, the government has recognized that as you approach retirement, you may be evaluating whether or not you have enough saved. As a result, if you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,500.

For those individuals who take part in a traditional IRA, the catch-up contribution is bumped up, but not as much as in a 401(k).  While the normal limit on annual contributions to an IRA is $7,000, the IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment.   In 2024, that adjustment is $1,000, bringing the total than an individual 50 or over can contribute to $8,000 annually.  While not a huge amount, every little bit can help at this point of your financial journey.

Disability Insurance 

One way to protect what you have built up is through the use of insurance.  One of the greatest risks faced by people is the possibility of not being able to work during their peak earning years.  While life insurance acts as a hedge against the possibility of death, disability insurance acts as a hedge against being unable to work.  In fact, the risk of being unable to work before retirement age is greater than the risk of untimely death.

There are three primary sources of disability insurance benefits.  Social Security disability benefits have strict requirements and will not likely provide adequate income replacement except for those with fairly low incomes.  Worker’s compensation is only designed to provide benefits to those injured while working.  According to the Social Security Administration, 95% of all disabling illnesses and accidents happen outside of the workplace.  Because most disabling accidents won’t be covered in the first two instances, that’s where an individual disability insurance policy comes into play.

The general rule of thumb is that individuals should have a minimum of 60-70% of their gross income protected with a disability insurance policy.  While it is helpful to have short-term disability coverage (where benefits range from one to two years), it is far more important to have long-term disability coverage.  The idea is to help replace income until you reach normal retirement age, when retirement income will commence.

When buying a disability insurance policy, you will find that there are a number of choices you will have to make other than the amount of income to replace.  Policies will define disability in a number of ways, with the premiums priced accordingly.  The most expensive policy will define disability as “own occupation,” which means if you are unable to perform each and every duty associated with your own occupation.  A less expensive policy defines disability as “any occupation,” meaning being unable to perform the duties of any occupation for which you’re qualified.  A surgeon would want an “own occupation” definition for their disability policy because of their specialized skills, while a telemarketer would find the “any occupation” policy more appropriate (and cheaper).

Estate Planning

In addition to being able to continue maximizing investments through the use of retirement catch-up contributions and protecting wealth through the use of a disability policy, there are additional steps you can take to ensure that your financial plan continues without interruption by utilizing estate planning.

While you may be able to make financial decisions for yourself right now, there are situations where you may want to vest someone else to conduct financial transactions on your behalf.  This will allow your financial wishes to be carried out even if you are not able to make the decisions.  Perhaps you’re going to be out of the country, or you will be incapacitated for a period of time.  A power of attorney is a legal document allowing an authorized person to operate on your behalf with regard to the management of finances.

The broadest power you can give someone is a general power of attorney. It allows the authorized person to do anything you could do.  Because the power is so broad, it is usually only reserved for spouses.  A limited power of attorney gives specific, detailed powers. The power granted may be extremely narrow, only authorizing the agent to act in a specified manner. For example, if you are to purchase a home and can’t attend the closing because you are out of the country, you can give a limited power of attorney to someone else authorizing them to sign your name at the act of sale.  Another way that a power of attorney can be structured is as a springing power.  In that case, the authorized person’s power to act “springs” into existence upon some defined event (i.e., at incapacity at deployment overseas) and ends when the event is over. It is commonly used by someone who is currently able to handle their own affairs but wants to plan for future contingencies.

This is also the time to consider what you want to have happen to your estate if the unthinkable happens and you pass away.  The best (and easiest) time to think about it is when you’re still in good health and are able to put things in place without feeling the pressure of time.  The two most common ways of directing the distribution of your estate are through a will or a trust, so let’s look at one of the main differences between them.

One difference between a will and a trust is that a will only goes into effect upon death, while a trust is established and in effect while you are still alive.  The advantage of a will is that it can be completed at a relatively low cost and easily amended or replaced with a new will.  In a trust, legal title to assets is vested in a trustee who manages the assets for beneficiaries. To form a trust, money or other property is retitled to the trustee. Often, the person who creates the trust is the trustee, and the assets are managed just as they were before they were retitled. It’s a more complicated process and costs more to set up than a will, but it avoids the cost and delay of probate.  And if you are the trustee of the trust, you can ensure that everything is managed just the way you want. 

How to Get Started

Any time you’re facing a mountain of financial decisions, it’s important to have someone who can help you cut through the jungle of information and options and set up a clear path.  By working with a professional financial adviser, they can help keep track of your financial situation and give you clear, objective advice to ensure that your financial goals are met.  Find someone that you’re comfortable with and let them help guide you on your financial journey. 

 

About Chase Investment Counsel

Chase Investment Counsel is a family and employee-owned boutique wealth management firm that offers personalized investment services. Our clients include career professionals, those nearing or in retirement, and families experiencing financial transitions such as generational wealth transfer, widowhood, divorce, or sale of a business. Chase’s active, disciplined investment management team is focused on selecting individual stocks and bonds targeted to each investor’s specific financial goals and risk tolerance. Established in 1957 in Charlottesville, VA, Chase Investment Counsel manages more than $400 million in assets.