The age 25-to-34 cohort often experiences moments of transition, with a steep learning curve and many life changes. But it’s important to save for retirement, even as marriages, children, new jobs and student loan debt demand your attention. Here’s how to get your finances under control and save for your retirement—even though it’s three to four decades away.
1. Conduct a Financial Assessment
It’s important to periodically conduct a financial analysis to determine whether you need to change your financial habits.
The frequency with which a financial analysis must be done will vary and may be affected by other factors, such as changes in interest rates, fiscal responsibilities, and recurring expenses. For instance, if your marital status has changed, retirement goals may need to be redefined.
Financial analysis is a necessity. It helps you identify what you’re doing well what you could improve. If you need help doing this, reach out to a certified financial planner.
2. Consider Refinancing Your Mortgage
If you’re fortunate enough to own your home, take a look at your interest rate. In most cases, you should refinance when the current mortgage interest rates are lower than the interest rate you’re receiving on your current mortgage.
Make sure to shop around for the lowest interest rate. Even a 0.5% percentage difference matters. And remember, many fees charged for mortgages, including refinancing, are negotiable. Don’t be afraid to ask if certain fees can be waived, or if your interest rate can be dropped even 0.25% lower. The worst that can happen is they’ll say no.
Refinancing a mortgage can be advantageous, provided it either increases your available cash by lowering the monthly payments, or reduces the amount paid in interest over the mortgage. You can then direct these savings towards your retirement goal.
3. Consolidate Debts
Consolidating debts can be ideal for someone with multiple credit cards and other forms of credit. It usually involves consolidating multiple loans under the umbrella of the a lower interest rate, which can sometimes shorten the repayment period. The goal is to reduce the overall amount of interest paid, so you can use those savings for other goals, such as retirement.
4. Update Your Budget
As your balance sheet and cost of living change, so does the need to reassess your budget. Maybe you’ll realize that you should cut back on some expenses. Or maybe you’ll decide that you need a raise (or a second job) to meet your expenses.
Revising your budget will help you make important decisions relating to retirement savings, such as whether to increase the budgeted amount that you add to your nest egg every month.
Increasing the amount you contribute to your retirement savings may seem like the ideal choice if you are not on track with your retirement savings goal. However, you must consider that other parts of your financial picture will have an effect on your nest egg. For example, if you have high-interest credit card debt, it may make sense to direct the amounts budgeted for retirement contributions towards the credit cards until they’re paid off.
5. Optimize Your Taxes If You’re Married
There are many financial benefits available to people who are married and file joint tax returns. For instance, the standard deduction is higher for married couples who file a joint return. Another example is where one spouse has little or no income (referred to as the non-working spouse), and the working spouse’s taxable income can be used as “eligible compensation” for purposes of funding the non-working spouse’s individual retirement account (a spousal IRA). This can result in a considerable increase in retirement savings for the couple by the time they retire.
However, there are also circumstances where it may make financial sense to file separate returns. For instance, if the family incurs a significant amount of medical expenses that were not reimbursed through a health plan, or if they have several miscellaneous deductions, filing separate returns may result in a lower tax bill.
To be sure, couples should consult with a tax professional who will be able to demonstrate the net financial effect of filing both options, making it possible to choose the one that will either result in the lowest tax liability or the greater tax refund amount.
The amount saved could be used to fund a retirement account for one or both spouses.
What Is Pay Yourself First?
Paying yourself first is a strategy for saving, often for retirement. It requires you to set up automatic withdrawals for soon after you get paid, so your savings goals are funded first.
What’s the Deadline for Contributing to an Individual Retirement Account (IRA)?
Individual retirement account (IRA) contributions for the year can be made from January 1 of the tax year up to the tax filing deadline of the following year. They can even be made after you’ve filed your tax return.
What Is a Credit Score?
A credit score is a number that assesses your credit-worthiness as a borrower. Lenders like mortgage companies and auto loan providers use credit scores to make loan decisions. A FICO score, for example, ranges from 300 (poor credit) to 850 (excellent credit).
The Bottom Line
Although these issues are most likely to apply to individuals between the ages of 25 and 34, they can apply to others as well. For instance, the choice of tax filing status for married couples, or the decision to refinance a mortgage, can apply to any age group. When planning for retirement, your fiscal readiness will be more important than your age.
To ensure that you are taking the most appropriate steps toward securing your financial future, it may be wise to consult with a competent retirement plan consultant or a financial planner.