Significant life transitions, like a birth, death, or divorce, can have an impact on both our personal and financial well-being. Whether the change is positive or negative, it can be easy to make spur-of-the-moment decisions. But change doesn’t have to be scary. Many people seek counseling during changes in their lives—if they are grieving a loss or divorce, or even if they are adjusting to a new job or a new baby. Why should seeking counsel about your finances be any different?
When life transitions happen, being proactive and prepared can provide you with a clearer path forward. A plan can help reduce unknowns and uncertainties. In this blog, we’ll explore how to navigate life transitions and how a financial advisor can help you adapt.
Understanding Life Transitions and Their Financial Implications
Many life transitions have financial implications—seen and unseen. Here are five common life transitions that significantly impact your financial circumstances.
Career Change or Job Loss
A career change usually means a pay increase, while a job loss usually involves a loss of income and collecting unemployment. Salary increases and decreases often catch people by surprise and they don’t always budget appropriately for it. With pay increases, many people simply “get used” to their increased income and begin spending more—even though that extra income could be used more wisely.
With a job loss, some people only consider short-term consequences (how will my grocery bills get paid?) as opposed to long-term consequences (what will this do to my emergency fund or savings?) Regardless of your situation, you can navigate a career change or job loss more effectively when you understand their implications on your immediate needs and future goals.
Marriage or Divorce
Both marriage and divorce bring lots of financial changes. Marriage means dual incomes, new beneficiaries on your retirement accounts, different life insurance policies—and sometimes prenup agreements. Divorce means many of the same things but in reverse, on top of additional legal fees. While marriage is often planned for, divorce rarely is. Both life transitions bring a lot of heightened emotions, making it easy to set aside long-term financial implications. At Flynn Wealth Partners, we often work with married couples and divorced people to create an adaptable plan that works for their circumstances.
Parenthood or Empty Nest
Everything changes when you bring a new baby into your life—including finances! Children are a significant (and worthwhile) investment with tax and life insurance implications. However, your budget isn’t the only thing that should change. Your long-term financial picture will change as well, including your will or trust. And when your children leave home, you may choose to continue to support them financially until they get on their feet by helping them pay for phone bills, car insurance, or college tuition. Regardless of where you are on your parenthood journey, your expenses will shift as your children grow older.
Retirement
When people think of life transitions, they often think of retirement as one of the more significant ones. And as retirement and financial planners, we agree! We see many clients who don’t start retirement planning until it’s within view. Retirement takes years of planning to be executed well. You’ll want to examine every aspect of your financial picture—from retirement accounts to your insurance plans and more. You should also consider future implications, such as Medicare or Medicaid, capital gains taxes from account withdrawals, and charitable giving opportunities.
Inheritance or Windfall
Most people tend to spend inheritance or windfall money much faster than the money they earned on their own. Heightened emotions can take over quickly—most people are not prepared for such a large amount of money. And these large sums of money can come with tax consequences. They can also pose further opportunities for your future goals, like increasing your lifestyle in retirement or tangibly memorializing the person you lost.
Now, let’s break down how to navigate these and other life transitions while remaining smart with your financial decisions and plans.
Assessing Your Financial Situation and Goals
If you find yourself in a life transition that affects your finances, what are you supposed to do first?
Start with the basics. Put a stake in the ground where you are currently. Ask yourself a few important questions:
- Income: How is this life transition going to affect my income? Will it increase or decrease?
- Expenses: What money am I spending that I don’t know I’m spending? Are my expenses aligned with this life transition?
- Assets: Will this life transition affect any of my current assets, like my home or my investments?
- Liabilities: Do my liabilities increase or decrease with this life transition? Is my insurance plan sufficient for this life transition?
Once you have assessed your financial situation, you can consider how your goals need to change. Maybe a new job is going to significantly increase your income, and your stretch goals are becoming more realistic. The loss of a spouse means the loss of income, so you need to reevaluate your debt structure and potentially refinance. Regardless of whether a life transition is positive, negative, or neutral, you should always evaluate your financial situation to determine what could change now or in the future.
This is where it’s vital to engage with a financial advisor. They can use their time and expertise to build a plan based on your current situation and how that situation might change. At Flynn Wealth, we’ve worked with clients through all sorts of life transitions, and each brings their financial challenges. A customized, adaptable plan can prevent you from making spontaneous decisions or straying from your goals.
Budgeting and Cash Flow Management
Most people see a budget as limiting or a huge time commitment. It’s neither! A budget frees up your money so you can do more of what you want with it. While most people think of budgeting more during a loss of income, adjusting your budget when you gain income is equally as important. In our office, we see a lot of clients who don’t always think about what they can do with that money other than spend it right away. With a budget, they can structure where they want that extra income to go—and achieve significant goals like paying off college debt, retiring earlier, or increasing their lifestyle in retirement.
For income increases, resist the urge to simply increase your discretionary spending. For income decreases, resist the urge to simply take on more debt or lines of credit. We often see clients simply “get used” to their new loss and gain instead of planning and budgeting for it. Take advantage of the season you are in by establishing or reevaluating your budget to meet your goals faster.
Managing Risk and Protecting Your Assets
During a life transition like divorce or the death of a spouse, it’s important to reevaluate your assets. For example, your health or life insurance may have been covered by a spouse’s employer, and you now need to find your own. Older individuals are sometimes tempted to cash out their 401(k) before 59.5 years of age. But this strategy comes with significant tax penalties.
It’s important to ask yourself what your blindspots are and what coverage needs to be re-examined during a life transition. Insurance can support you in unforeseen events like injury or disaster, and rates vary based on where you live, how old you are, and who depends on you.
Key assets like your 401(k) and other retirement accounts need to be evaluated as well. If your spouse has died or you are divorced, they are no longer a beneficiary on your account. Or if you are starting a new job, you may need to roll over a previous 401(k) into a new account.
Planning for the Future and Long-Term Financial Security
In any life transition, thinking long-term is the best strategy. For the birth of a child, think ahead to college and set up a 529 plan. For a divorce, think about how your retirement might look different. The more you plan with the future in mind, the more your future self will thank you!
However, it’s impossible to plan for every reality. That’s where emergency funds come in. An emergency fund can be a saving grace during unexpected events like a job loss, car accident, or basement flooding. Nobody wants these events to happen, and no one wants to go into debt when they happen, either. Having an emergency fund can prevent you from taking out credit or debt to pay for unexpected circumstances.
The amount in your emergency fund depends on your lifestyle, family structure, monthly spending, and income. Most people follow the rule of thumb of three to six months’ expenses in their emergency fund. Unlike a 401(k) or IRA, an emergency fund should be easily accessible with no withdrawal penalties. Many banks offer options to set up additional savings accounts, some of which accrue interest over time. An emergency bank account is better than envelopes of cash stocked under your mattress!
In both emergencies and life transitions, a financial advisor can help you navigate the uncertainties. They can see opportunities to adjust your 401(k) contributions, reevaluate your debt structure, or find a better insurance policy.
Emotional and Psychological Support
While this blog has mostly focused on the health of your finances during a life transition, your mental and emotional health should also be a priority. After all, heightened emotions can lead to impulsive decisions that can take a toll on your finances.
While we’re not therapists, we financial advisors have walked with a lot of families through a lot of difficult times. We’ve sat with parents who are sending their last child off to college. We’ve planned with children who recently lost their mom or dad. And we’ve supported widows and widowers who don’t know what the rest of their retirement will look like. Having someone reliable that you can trust during difficult times can ease your burden and reduce the stress that comes with a life transition.
Navigate Life Transitions with Confidence
Life transitions big and small are inevitable. But when you are prepared and proactive, you can feel more confident about the future. In this blog, we covered how to navigate life transitions—and how a financial advisor can help.
Whether you are facing a smaller milestone like a career change or a larger one like retirement, financial advisors like Flynn Wealth Partners can help. We provide personalized, professional assistance for every individual. Even if you aren’t facing a significant transition at the moment, we can prepare you for the ones that may be on the horizon. Contact our office today for a complimentary consultation to see if we can help you reach your financial goals—no matter your season of life!