Thinkstock
The kids are old enough
to drive themselves to band practice, and you're planning an anniversary
getaway with your spouse. Life is good. But college bills loom, and
you're neglecting your retirement accounts as you sock away money for
college.
Beef up investing. Saving for retirement is the priority. First, max out contributions to your workplace retirement plan. In 2016, you can contribute up to $18,000 to a 401(k) or similar employer-provided savings plan (or $24,000 if you're 50 or older). But be careful. If you stash all of your retirement savings in tax-deferred accounts, you could find yourself facing a big tax hit when you retire, says Jon Meyer, a CFP in Minneapolis. Withdrawals from 401(k) plans and traditional IRAs are taxed at your ordinary income tax rate.
If you aren't
contributing to a Roth IRA, this is a good time to start. Contributions
are after-tax, but withdrawals are tax- and penalty-free as long as
you're at least 59½ and have owned the Roth for at least five years. In
2016, you and your spouse can each stash up to $5,500 in a Roth ($6,500
if you're 50 or older) if your adjusted gross income is $184,000 or
less; if your AGI is between $184,000 and $194,000, you can contribute a
reduced amount.
Taxable savings accounts will also help minimize
your tax bills in retirement. Most investors pay 15% on long-term
capital gains and dividends; investors in the 10% and 15% tax brackets
pay 0%. Choose tax-efficient index funds or actively managed funds with
low turnover to hold down your tax bill even further, Meyer says.
Save
at least enough in your retirement plan to take full advantage of the
company match. After that, says Meyer, the breakdown between taxable and
tax-deferred accounts depends on your tax bracket. Workers in lower tax
brackets are better off diverting some of their savings to a Roth and
taxable accounts because the immediate benefit of tax deferral is less
valuable. If you're in a high tax bracket--say 35%--sock away as much as
you can in tax-deferred accounts because you'll probably be in a lower
tax bracket when you take withdrawals.
It
is also an excellent time to sit down with a financial planner and
review your investment mix. Over long periods, stocks deliver higher
returns than bonds. You need a healthy share of stocks and stock mutual
funds in your portfolio to build a nest egg that will last 30 years or
longer.
Juggle saving for college and retirement.
It's tempting to put retirement savings on hold in order to give your
children the best college education that money can buy. But financial
planners are nearly unanimous in their belief that this is a bad idea.
The
reason is simple: You (or your children) can borrow for college, but
you can't borrow for retirement, and it's difficult to make up for lost
time. Working longer isn't always an option: Many people are forced to
retire earlier than they planned because of health problems or corporate
downsizing. If you reach retirement and you've saved more than you
need, you can help your children pay off their student loans, says
Andrew Houte, a CFP in Brookfield, Wis. Plus, "it's not the worst thing
in the world for your kids to have some skin in the game," says Houte.
Max out your earnings.
Remain technologically nimble, even if you don't work for a high-tech
company. There are plenty of online courses you can take to improve your
social media and digital skills. Constant Contact
offers online seminars (some of them free) on how to use social media
for a variety of business purposes. Many local community colleges and
university extension offices provide courses designed to enhance your
digital skills. You can find YouTube videos on everything from computer
coding to Adobe Photoshop.
Don't
focus just on how much money you take home every week. Make sure you're
taking advantage of employee benefits that could build wealth and
contribute to your retirement security. Does your employer match
contributions to a health savings account? Offer retiree health
benefits? A pension? Houte says some of his clients have switched
jobs---and even taken a pay cut---in order to work for an employer that
provides better retirement benefits.
Pay off debt.
Retiring mortgage-free is a worthy goal. You'll eliminate one of your
largest expenses, which means you won't be forced to take large
withdrawals from your retirement savings during market downturns to pay
the bills. But at this point in your life, there may be better uses for
your money, especially if you have a mortgage with a low interest rate.
Focus on paying off debt with higher interest rates, such as credit card
balances and parent college loans.
If
you still have money left over, consider accelerating your mortgage
payments. You could refinance to a 15-year mortgage, or you could simply
make extra payments on your current mortgage. You'll pay the equivalent
of 13 monthly payments instead of 12 by dividing your payment by 12 and
adding that amount to each monthly bill. Or you could simply make an
extra payment at year-end. On a 30-year mortgage, making an extra
monthly payment each year would reduce the term of your loan by about
four years.
Culled from Kiplinger
No comments:
Post a Comment