April represents Financial Literacy Month in the United States. Financial literacy covers various aspects of personal finance. It encompasses knowledge on topics like spending, saving, investing, borrowing, and protecting money. By learning the skills of financial literacy, you can make informed decisions with your finances that will help you navigate a path to financial freedom. In this article, I break down a few key topics of financial literacy for various age groups… starting with the essential knowledge to teach your children through crucial items to know in your retirement.
Ages 5-18 (Childhood Years)
In the early stages of life, when your children are first starting to learn how to count, you can work with them on counting money. This can be done at home with “play money” or you can have them help you count money when you make a purchase. This will allow them to develop an understanding, at a young age, of money’s basic function.
As your children continue their education, they will be ready for new concepts about money. During this stage, you can talk with them about earning, saving, and spending money. This can also be a great time to have them start thinking about what they might want to be when they grow up. Having them think about ways they can earn money can plant a seed for them to begin looking around their communities to see the roles we play in them.
As they get into their teenage years, you’ll want to introduce them to more complex topics such as investing, debt, and taxes. They may even have their own bank account and be earning some income themselves. By introducing them to these concepts at an early age, they can get a head start in planning for their future. It can also help them avoid a costly mistake.
Ages 18-65 (Accumulation Years)
As you begin working, you’ll enter your accumulation years. Throughout these years it will be crucial for you to use your working income to accumulate assets. By accumulating assets, you’ll be able to generate income from them in retirement. To get to retirement, you’ll need to know a few important topics. In my opinion, one of the most important lessons to learn is the psychology of money. This includes financial principles such as spending less than you make, paying yourself first, playing the long game, and time in the market versus trying to time the market.
Once you’ve developed a good understanding of how your behavior affects your finances, it will then be time to apply those principles. Earning a high income will most likely not be enough to get to retirement, you should consider investing a portion of your income in assets that can grow in value over time. Investments can vary from the stock market, real estate, or owning your own business but the most important part of the investment is to not put your short-term money in a long-term investment.
As you continue to accumulate assets, you will want to diversify your assets and hedge the risks in your life. Developing an understanding of insurance and spreading your assets out among different asset classes will help ensure that when life happens, you will be able to still reach your goals.
Ages 65+ (Retirement Years)
As you reach your retirement years, financial literacy will remain crucial for you to navigate the distribution stage of your finances. Topics like retirement income planning, social security planning, and charitable strategies will help you make the most of the years you worked hard to live.
When looking at taking distributions from your assets, you will want to review the tax status of each of them. There are three different categories: pre-tax, after-tax, and taxable. For your pre-tax assets, like a 401(k) or traditional IRA, you will pay taxes on the money you withdraw. For after-tax assets, like a Roth IRA or Roth 401(k), you will not owe any taxes on the money you withdraw. Reviewing the tax status of your assets and determining the most tax-efficient way to pull money from these assets can help you lower your tax bill throughout retirement.
Your retirement accounts will not be the only income that you will have to plan for in retirement. You will also need to review your Social Security to determine at what age you should start to draw and the tax liability of your benefit. Taking your Social Security early will result in reduced benefits, which is approximately 8% each year before your full retirement age. Determining a Social Security strategy can help you maximize this benefit.
For retirees looking to be charitable, there are some strategies you can utilize to make the most of your charitable intent. A common strategy is known as Qualified Charitable Distributions. This allows you to gift money from your Individual Retirement Account to a qualified charity without having to pay taxes on the gift, allowing the charity to receive the full amount of your gift.
Throughout your life, financial literacy will play an important role in helping you navigate your finances. Taking time to learn the different aspects of financial literacy can equip you with the knowledge to make informed money decisions in the future. Take this month as an opportunity to gain a deeper understanding of financial literacy.
-by Jacob Young, AAMS®
Financial Advisor, RJFS
313 East 10th Ave.
Bowling Green, KY 42101
Phone: 270-846-2656
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Ben Smith Life Compass Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
