Spring is the time of year when we all want to clean out the winter dreariness and usher in the new season. This is also a good time of year to take a look at your financial house and see whether it too needs a little sprucing up.
For the Moms Making a Million Radio Show, I discussed the how-tos and what-fors of that task with a look at retirement planning for the mid-career mom and the savings you may have been doing for your child’s college.
Spring Cleaning for Your Retirement Plan
There is nothing like the feeling of spring. And we should use it to trigger some financial house cleaning. A lot like figuring out what in your closet you should toss or give to charity, using this spring-cleaning feeling to look at your finances can and should become a regular habit.
The toughest thing to do is figuring out where to start. Surprisingly, it doesn’t take that long. None of us goes a day without thinking about where we are in terms of how much money we have, where it is going and how do I get more. So we already know some of the answers to the question: does this old financial plan still fit?
It probably doesn’t. Most of us are mid-career and probably have a house, kids, a job or a business (which is like a job only you get to pick the sixty hours a week you work). Some of us have parents who may or may not live with us. So basically, this spring financial cleaning is a way to reorganize that closet, reprioritizing what your will need to do sooner rather than later.
Start with the Kids
You want them to go to college and you may have even been investing since they were born with the hope that you will have enough to pay for their higher education. Just like your retirement plans, a wide swath of these 529 plans were hit with the economic downturn. This was not part of the plan and rather than blame anyone, we have to find a way to do with what is left.
First: If you don’t have the money or the money you anticipating having, do not tap your retirement account to make up the difference. Speak frankly with your child about this and tell them that either they are going to have to take a larger student loan or they are going to have to pare down their aspirations. You may be able to afford a state college and not the private institution you had hoped for. But it is up to you lay down your parameters. They probably won’t like it and claim, you promised. But don’t cave. A lot of people do.
Although your student won’t appreciate it now but the reasoning behind such tough love is simple: you don’t want to come up short in your retirement and have to move in with them! Think for a moment about that scenario.
Considering Your Retirement
We should consider a retirement plan as a whole. Things may have changed dramatically since the last time you did this (and like that pair of jeans from high school, some things will simply not fit who and what you are anymore). Look at the house you are living in. Is it too big? Will it need some upgrades to make it more sale-able? Or do you plan on spending your golden years there? No matter which one you decide on, and this may change completely in a couple of years, figure out where you are on your mortgage. If you have a thirty-year mortgage and a retirement goal of twenty years, will you be able to continue to pay for the house, the insurances, the upkeep and the taxes with what you have socked away in your 401K?
Probably not. This mean you will either have to invest even more to make up for the shortfall or reconsider the housing/mortgage option. Keep in mind, a $50,000 a year income—with a withdrawal rate of 4 percent, which many feel is the number that will allow you to outlive your money—will need a $1.25 million nest egg. You should also consider Social Security, Pensions and any other income sources you might have as well.
But Social Security, although I believe it will be there might not be there the way we imagined it. The retirement age will have to be pushed further back and this could have an impact on your plans. The pension also might see some setbacks, even some freezing. So if your primary source of retirement income is your 401(k), then focus on it. Contribute more.
How much more? This is tough one. You are older so that means, if you are following the most recommended method of scaling back on riskier equity investments and moving into something more conservative—then a lot more. The real key is to find other investments and spread the risk across a wide variety. Don’t just invest in an index fund and hope for the best.
If your 401K plan offers advice, take it. Some of us might want to add less risk to our portfolio without giving up the assets we already have. I like that idea best.
But just like it takes a day to clean out the closet, set aside one of those rainy spring days to clean out your financial house.