The new year is the perfect time to start fresh; it’s a time when you can begin something new or vow to change something from the past. It’s also a great time to focus on your retirement savings plan.
Here are 6 tips that can help you get on track to a fully funded future:
1. Student Loans
Don’t worry about quickly paying off your student loans unless the interest rate is really high. It is important to realize that $2,500 of a student loan’s interest is tax deductible. Also, interest rates are often fixed and fairly low—between 3.4% and 6.8% for loans issued after 2006. Keeping them and paying them off slowly makes sense. Of course, like any debt, it is better to eventually pay them off than to have them. Make sure you pay off your higher interest loans first. This strategy will make a real impact on your financial landscape by helping you pay off debt faster and save for the future sooner.
2. Money for a House
Siphon off cash for a down payment. As untouchable as retirement accounts should normally be, a loan from your retirement account can be a good idea. You can repay the loan over 30 years, under most plans when the loan is intended to help with the down payment for a principal residence, and the interest you pay goes back into your same retirement account. To justify this strategy, you need to have enough time before retirement to repay the loan and replenish the accounts. Also, be strategic about which investment account you tap. Take the money from the conservative portion of your investment portfolio. For example, the interest you are paying back to yourself can replace a bond fund or money market fund.
3. No Cashing Out!
Resist cashing out a retirement account. When you leave a job, you have several options. You can leave your account with your former employer, roll it into an IRA, roll it into your new employer’s plan (if your employer permits such rollovers), or ask your former employer to cut you a check. You may be tempted to choose the last option, but in most cases, that’s a bad idea.
4. Prepare for Contingencies
If you have not done so already, fuel an emergency fund with enough money to cover at least six month’s worth of basic expenses. This cushion helps keep you solvent after a layoff and prevents you from borrowing your way out of a crisis. The key is to have access, not necessarily cash on hand, for up to 6 month’s worth of expenses.
5. Dare to Downsize
You may have hoped to move to smaller living accommodations as soon as the kids were grown. Some 74 homeowners, who have watched the value of their homes decline in recent years, are reluctant to sell until the real estate market rebounds. Even if your home hasn’t returned to its former value, moving to a smaller, less expensive home can save you thousands of dollars a year in taxes, utility costs, and insurance. These savings can be funneled into retirement savings. You may need some help with this approach but do the financial analysis and make a wise decision. An accountant can help you with the math.
6. Catch-Up Contributions
Because so many people wait too long, there are powerful government incentives that work in your favor once you’re over 50. At 50 and above, you are permitted to contribute significantly more to your 403(b) or 401(k) plan than your younger colleagues. The current “catch-up” percent of your age (50) is $5,500 a year. Make sure to check the current amount because it does change occasionally.