Young Professionals: Now that you’re past the basics of financial planning, what should you be thinking about as you continue building your wealth? Host Michael MacKelvie, wealth advisor, is joined by Jinger Pajestka, senior wealth advisor, to discuss goal setting, employer benefits, real estate investing, estate planning and insurance, all to help you to build your wealth.

Transcript

Michael MacKelvie: Young professionals, what are the 201, 301 items you should be concerned with? You’ve maybe knocked out some of the basics. What else is it that you should be thinking about if you’re curious about how you should best build your wealth? That’s what we’re here to talk about today.

So, I am joined by Jinger Pajestka. She is a senior wealth advisor here at Mariner. Jinger, thanks for joining us.

Jinger Pajestka: Yeah, of course. Thank you for having me.

Michael: Yeah. I know that you had mentioned obviously just working with so many of these younger professionals that are doing well, and we had a chance just to talk a little bit about how, okay, you’ve maybe checked out some of these basics. You’ve got the savings going, you’re maybe putting some money in your 401(k), you’ve maybe purchased your first house. What comes next? And I think that is the general progression. As we get older, life gets a little bit more complex. It becomes a question of, okay, well, I have a finite amount of money, but there’s an infinite amount of things I can do. What is it that I should maybe do?

So, I think maybe where we should start is just by stating that yes, we’re going to have competing goals. Sometimes it helps to just visualize these things, so I want our viewers to maybe visualize their life as a timeline. And you have at one end where you are today, and at the other end, I hate to say it, but two out of two of us are going to eventually pass away. We don’t know when that end is, but let’s just assume, since we’re planning, that it’s at least some type of distant future. If you’re 30, 40 years old, it’s maybe 40, 50 years away from you. You are going to invariably have some goals that are short term, some goals that are midterm or pre-retirement, and longer-term goals that are retirement-focused, financial-independence-focused goals.

That is critically important to understand because, well, there’s these different ways we can invest our monies, and different investments that are out there that might align better with these different buckets. For instance, a short-term bucket, well, we got to spend money every day. You got to have a savings account. A long-term bucket, an easy example there, real estate, 401(k). You can’t access that before the year in which you turn 59½ without any special provisions, equal distributions, all that.

So, is that something that you find yourself … Just, I guess, I’m just curious, is that something you find yourself in conversation frequently with folks with? It’s like, “Hey, you got the savings, you got money going towards your 401(k), and yeah, there’s maybe some room for improvement in both those areas.” But I feel like most of the folks that I’m talking to that are doing well, that are younger, are trying to figure out, “Okay, what is it that I can maybe do that I can access here in the next 10 to 15 or 20 years?”

Jinger: Right. No, it’s true, Michael. We have a lot of younger professionals that come to us, and they’ve got the emergency savings. They’ve got short-term goals established for finances. They know about the 401(k), they’ve done what they can to get it set up. We have that percentage going out of our paycheck every biweekly, monthly, whatever that may be. But it’s that weird space in between of the unknown. Because life inevitably was going to happen, and we need to be prepared. So, whether that’s for an emergency, or maybe we haven’t bought our first house yet, and we want to save for that.

So, when we think of these timelines, even whether they’re short-, mid-, or long-term, there’s still buckets of money. So, if we can maybe set up different avenues of whether it’s a savings account, or an individual brokerage account where we’re putting some additional money in for savings, but that’s a great place to start is coming up with an idea of what those buckets are going to be for for you. So, you may have the emergency savings. If you haven’t bought the house, it would be a savings account for maybe the down payment of a house. It may be that there’s a wedding in the next five years that you’re trying to save for or something really important.

Those are the areas that we want to have accounts that have purpose, not just dumping everything into one place sometimes. Because it gets meshed together. Especially organization is important for young professionals, because we want to see that that goal that we’re working towards is growing. So, I have a lot of my clients come to me, and we have all of these accounts all over, but we really don’t have an idea of what each one is really for. We’re just putting money in them. So, I think you can nickname your accounts now and so forth, but really having a good idea of how much do we want to put away for each one of those items and which ones are more important?

And even these midterm goals, those could be 10 years down the road, and it’s okay. And life’s going to happen in between, and maybe that goal gets pushed out another year or whatever it may be, or it’s not the right time. But that’s okay. At least you have a game plan in place and something established that you can follow that track on.

Michael: Yeah. And I would say college is a great example of that. So, typically happening before retirement, how much are we setting aside? Where are we setting that aside? I can’t tell you how many people I’ve talked to that are multimillionaires that have done nothing in the college planning area with kids that are maybe 10, 15. And you still can do something.

Jinger: Correct.

Michael: Better than just cash flowing it. So, there might be gifting strategies, for instance, to a UTMA or some type of custodial account that makes sense for you. There might be setting up and superfunding a 529 that might make sense for you. There might be a Roth or something like that, or getting the kids on the payroll if you’re a business owner. So, those are all typically goals that, again, are not necessarily just short term, especially with what we can get from a yield standpoint in today’s interest rate environment, but more of a midterm goal that might be worth really putting a little bit more purpose and a little bit more of an investment strategy towards. Again, different than something that’s 20, 30 years out, where we can maybe afford to be a little bit more aggressive and afford to take on a little bit of volatility on the way. So, college is a great example of that.

The other example I run into, it’s helpful to think of that midterm bucket not just as a long-term growth, maximization-aggressive bucket, but an opportunistic one. And this is maybe where my stance is slightly different than others, and that’s okay. But if we think of what you want to have as far as access to, well, when would you want to have access to that bucket? When an opportunity presents itself. When do a lot of opportunities present themselves? Typically, during bad times.

Jinger: Right. Right.

Michael: And so, if you want to have something that you can access during bad times, and if you’re only solely investing, let’s just say you work at a company and you’ve acquired all this company stock, or you’re just plowing it all into some investment piece of real estate, if you’re only investing maybe into longer forms of investments that have higher volatility, and you need that money during that down period, well, it’s likely that it’s also going to be down during that tough time. So, we have to consciously decide, okay, do I want to set some money aside almost as a buffer beyond my emergency reserve?

Jinger: Correct.

Michael: And not just for safety purposes, but for opportunistic purposes. That’s always how I’ve approached it personally. And in speaking with people, I feel as though a lot of times they’re comfortable in knowing, “Okay, yeah, I’m fine setting something aside and carving off maybe a few percentage points on the top as far as the long-term return if I know that this maybe isn’t perfectly correlated with the equities in real estate market and maybe experiences less volatility; i.e., less risk in a certain way than those more aggressive assets.”

So, I think that midterm bucket is something that is one that a lot of folks can wrap their head around, and that might be a slice of your brokerage account. So, your brokerage account maybe has a few $100,000 in it. And instead of just having it all in equities because you’re like, “Well, I’m young and I got a 30-year time horizon,” you maybe say, “I’m going to have 50, 30, $40,000 of it in something that is maybe a little bit more than a money market” or just a money market today because of what yields are.

Again, it depends on your situation, but point being something more aggressive than just checking account, less aggressive than just pure equities in real estate. I think a lot of people can wrap their heads around it, and I think that’s a wise move for a lot of younger professionals.

Jinger: No, I think that’s great. Definitely understanding what’s going on inside those buckets throughout the year and just making sure you’re watching them.

Michael: Sure.

Jinger: A lot of young professionals will come to me, and like I said, they’re putting all this money in. They’re putting the pieces in, but we’re not really watching it. We’re not looking at situations or how close we are to timelines. So, just being really aware of those opportunities that are available at that moment and what works best for you is really important.

Michael: And I think that gets into the inefficiency. So, making sure that we’re keeping track of the efficiencies of our money. So, there’s obviously inefficiencies we can find in the long-term bucket, inefficiencies in the midterm bucket. And one of those might be just maybe not managing the taxes correctly or being aware of the tax impact long term. You might be building a long-term tax bomb for yourself.

Jinger: Correct.

Michael: You might not be taking advantage of your benefits at your company in the best way. And I know that’s something that you wanted to touch on was just, How do I make sure that I maximize my benefits? And this isn’t just like the HR version of, “Hey, you sat there in a presentation, you understood that there’s this thing called an HSA.” Actually, understand. I speak with engineers at tech companies that are unaware of just massive opportunities within their company benefits. Senior-level engineers, executives unaware of these opportunities. And I know you wanted to make sure that you touched on that because you’ve ran into it, too.

Jinger: Yes. No, it’s really important. I have clients from as young as 21 to 100 and so, literally, we have this area. Everybody’s got some form of benefit plan while they’re working, and they’re all different. And you can go from one company to the next and it changes. So, being aware of what your company offers and asking questions during the open-enrollment process, really understand what those could be.

They could be legal services, where maybe it gets you a benefit and discount on meeting with an attorney to have your estate planning documents created. It’s a great benefit to utilize. Maybe it’s $7 a paycheck or whatever it may be, but you can always turn that off the next year, once you have that taken care of for that year. You have your life insurance. It’s relatively cheap with your employer.

So, maximizing those benefits and getting the life insurance maybe for your spouse because their employer doesn’t offer it. There’s a lot of avenues. The HSA is a huge one as well. I had a client recently retired that didn’t know that she could go to Sephora and buy her prescription-type skin care with her HSA account. And so, there’s a lot of different ways that we can use these tools that employers provide us.

Michael: I didn’t know that.

Jinger: I know. It’s so great.

Michael: That’s a big deal, too, for any of the guys who may be thinking about gifts for their spouses.

Jinger: You can also use it for other things.

Michael: Yeah. Would they look at that differently if your significant other, for example, bought you a gift out of their HSA? Would you judge them off that? I don’t know.

Jinger: I would be proud.

Michael: Yeah. Yeah. Yeah. Like, “Hey, I got this on sale in a different way.”

Jinger: Yeah. No, it’s great. I love it.

Michael: Yeah. So, HSA, you can use that as a retirement account down the road.

Jinger: Right. Correct.

Michael: You can do that, a way of self-insuring at least partially or potentially fully against something like long-term care. Your ESPP, a lot of times folks are unaware of just how to best maximize that. They’re unaware of, okay, what should I do with these RSUs? They’re just accumulating after they vest. And then, there’s that mega backdoor Roth, where you maybe have hit the max on your pre-tax. You know, “Yeah, I’m maxing out my 401(k).” And then, we ask, the question being, “Well, are you guys eligible for after-tax contributions?” They’re like, “What’s that?”

Or maybe they haven’t considered pushing money from their brokerage account to their savings. This is something I do with a lot of clients that are maybe closer to retirement, but pushing money from their brokerage account to their savings and just not even taking a paycheck for some months. And plowing that money into the after-tax, which then goes to their Roth that they convert.

Jinger: And that’s definitely something that a lot of clients, when we think about these buckets of money, sometimes we get too attached to them. So, being open to opportunity where we have money established somewhere that we’ve saved and we’ve taken care of, and it’s done great and it’s served its purpose. And now, we’re to this point where we could really be maximizing in other areas and opportunities. Where can we pull the cash from, that cash flow? Everybody worries about the paycheck being less.

Well, if we’ve got other savings and other avenues saved and our brokerage account’s done well, and we’ve put assets in other areas that we can utilize, utilize those assets, like you said, to just replace that paycheck piece that we’re missing. It’s a great way of looking at it from a larger scale than just, “What can I put in my 401(k) that’s coming out of my paycheck that I’m comfortable with?” Well, we can backfill that. It’s okay. So, always understanding those opportunities that are available for you.

Michael: Definitely. Definitely. And real estate might come up in that conversation. Hey, we’re thinking about with our current primary, just keeping it and renting it out. Very rarely has somebody looked at the IRR of that decision and compared it, importantly, to what the IRR, internal rate of return, is to maybe alternative investments, whatever that might be. Your business, or maybe it’s investing in a brokerage account, or putting more money into your retirement benefits because you aren’t maxing those out.

I think with real estate, it’s very attractive. We see it everywhere. We see it on TV. There’s these shows that make it look so easy and fun. The question is, Does that actually pencil out for a younger family, and for any family, from an investment standpoint? So, that’s also one that comes up a lot in that midterm area in a 201, 301, after people have got some money going towards their 401(k) and their savings. Hey, what if we invested in real estate?

What I would say is just making sure that you truly have evaluated the internal rate of return of said decision in comparison to something else, and also taking into account the time that would maybe be associated with that decision. There’s this thing called the planning fallacy. We tend to underestimate how much time we’re going to spend on projects. I was guilty of that. Twenty-three trips to Home Depot later I realized, yeah, this is going to take a little longer.

But I’m sure you’ve come across that for a lot of younger folks, too, as they eyeball potential real estate investing as their next step, after they’ve maybe checked off the savings and the longer-term 401(k) planning.

Jinger: I even have had a few situations that come up, it’s a great topic, that it didn’t make sense in their current marketplace to actually purchase their own home. And so, they’ve actually purchased rental property instead.

Michael: Oh, yeah. It’s a weird time. Yes.

Jinger: And especially if you’re in a situation, especially for young professionals, we don’t know how long we’re going to be in some of our roles within our employers. Sometimes we may be a promotion that takes us across the country, or we take a different position somewhere else. So, there’s a lot of movement in our lives at this time, a lot of, not uncertainty, but we’re moving in all these different directions and it’s exciting. So, understanding that maybe it’s not the right time to purchase a home. That’s okay.

I think a lot of us get hung up on we were ingrained from our loved ones that you graduate college and you get the job, and you buy the house and you do all these things on a specific timeline. But it doesn’t have to be in the same order.

Michael: Life is not linear.

Jinger: It’s going to be different for everyone in different situations, right? Very true.

Michael: Yeah, life is not linear. But we do know, at least somewhat, that it’s finite, our life here. And because of that, we got to do something called estate planning. Or you could just not do that and the government decides where everything goes. But I think a lot of times when I’m meeting a younger family that’s doing well, they’ve, again, knocked out a lot of these pieces. But the estate plan, oh, that’s something we got to get to. Nobody likes planning their own mortality.

So, I think maybe the basics getting covered there, going to an estate planning attorney is something that is definitely helpful, but it’s also helpful maybe communicating with your advisor. Because sometimes you need to go to that attorney, a lot of the times, depending on how complex your estate is, and let them know what you need. So, if you just go to the attorney and you say, “Hey, I want help with getting my estate plan in order,” they might not take into account, for example, the future planning of said business, or said large transaction to where you’re going to get this big bonus and now your estate is going to be considerably higher. And yeah, it makes sense to get some trust planning done. Or a specific type of trust that might make sense.

If you have a larger estate, you really need to go to the estate planning attorney. And when I say larger estate, just for reference purposes, at the state level, if your state has an estate tax, that could be just over two, three million from an estate standpoint. If it’s the federal level, well, we know that’s sunsetting, likely to significantly drop here in the near future. So, that could be just over five million. We’ll see with that. But point being is, if you just go to the attorney and just ask for the basics, that might not be everything.

Something I’ve found that’s really helpful in just reading through current estate plans, everybody always says, “Yeah, I got an estate plan,” if they’ve talked to an attorney. The question is, is it up to date, funded and accurate for your current situation? And a lot of times I don’t see that. So, I think you had mentioned a big piece on that was just making sure the insurance, too, is covering what’s needed. And that’s a part of that estate plan as well, right?

Jinger: Correct. I have a lot of younger clients that come in and they’re maybe starting a family or they just got married. And it’s like, “What do we do next? How do we plan for life and merging finances, and how do we protect each other?” And so, the first thing is meeting with an attorney or utilizing those legal services that you get from your employer as a benefit, and sitting down and understanding what’s important to both of you, really having those discussions. Because it’s important to have that communication on both sides. Maybe there is a child involved or aging parents, or there’s some other worries that may be happening.

But the estate planning is so important from the standpoint of just having those power of attorneys, the medical DNR. Do you need a trust? Everybody thinks, “Oh, well, you have to have all this money to have a trust.” Well, no. It may just be with your circumstances because a child, or maybe it’s a second marriage, or whatever it may be, that there’s some additional planning that is definitely needed. Or like you mentioned, we may have a taxable estate at some point. These younger professionals make up 30% of the current workforce, and they’re going to keep growing this wealth and continue to build. And so, this accumulation phase is going to continue for them, which could be a taxable situation. So, understanding that’s really important.

And definitely having your documents reevaluated. I know they say 12, but I would even say anytime there’s a life-event change. Anytime there’s a new child or we make a big move, especially if you leave a state. Sometimes you need to get new documents driven up and just looked over to make sure that those state laws aren’t different for you. And that you don’t need to worry about whether it’s in California or Texas or another state. So, just being aware.

And then, you mentioned about the insurance piece. Protecting our family and our loved ones. I know we don’t want to think about that, thinking about planning for our own mortality, but who do we care about? Is it a parent that we know that we’ll need to financially care for when they get older? A sibling maybe? Or maybe we have children or just got married. We definitely want to make sure that things are taken care of for them. And so, maybe thinking of it from a standpoint of, “I don’t need insurance. Everything’s going to be fine.” But more so of, “Who would need to be taken care of after I’m no longer here and can’t do it for them?”

And so, coming up with an amount that would make sense for them is difficult. So, having that discussion with your financial advisor, estate attorney, just to determine what would make sense for you. It may make sense for one person, that doesn’t make sense for another. You don’t need to go out and get a million-dollar policy. But we need to make sure that we’re covering all the bases and individuals are taken care of, and we’re not leaving a large mortgage or something to somebody to take care of. We can never put a price tag on the loss of a loved one, but when we’re thinking of a married couple, it’s a loss of income, too. Or maybe a business owner that’s family ran.

Those are items that really need to be factored in in making that determination. It’s never easy, but it’s definitely very important.

Michael: Yeah. And all this is obviously a balancing act of sorts, too, right?

Jinger: Very much so. I feel like the balancing act comes back to that old timeline of when we have to do things. And I think it’s ingrained in us to think we have to do them in a certain order. And I think taking a step back and understanding that your life and your happiness is also really important. Planning for the future and for loved ones and for kids, that’s just as important.

But you have to sit back and do things for yourself and enjoy those moments, because we can’t get those moments back. Like you said, we all have that timeline that we’re not aware of or sure when. But if we focus on maybe one or two little things a little too deeply, then we miss sight of the bigger picture, and that’s enjoying what we have right in front of us.

Michael: Very true.

Jinger: So, I think it’s okay to have a different timeline. It’s not going to be a bad thing if you wait five more years to buy your first house. I know I was early 30s when I did, and then I sold it four years later and moved across the country. So, it was okay. And it’s all right. You don’t have to have a specific timeline to follow. It’s what matters to you the most and enjoy the times that you do have.

Michael: Yeah. I bought my first house in my 20s and then today, it makes sense to rent. It’s consciously making that decision based on where you’re at in life. So, thanks for joining us today, Jinger. Really appreciate it.

Jinger: Yeah, thanks for having me.

Michael: Of course. Of course. And if you’re listening to this on Apple Podcasts, Spotify, YouTube, wherever you might be listening, make sure to hit that ‘Subscribe’ so you don’t miss out on any industry insights from industry professionals here at Mariner. Again, my name’s Michael. I was joined by Jinger today. Take care. Thanks for joining us.

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