Life can resemble flour in the Kitchenaid. Often it blends in smoothly. At other times, you’ve got a powdery mess. You clean it up and keep going.
Hopefully the year’s been good to you. If not, a new one is dawning. Here are some reminders as you look to the future… where you and your family will spend the rest of your lives.
Save more – Socking away sufficient savings, plus smart investment strategies put you well on the road for living with dignity and independence in retirement. Prudent savers build nests with both after-tax, and retirement accounts – plus real estate and business investments. Retirement accounts are convenient (forced savings) and there are a couple of barriers from dipping into them before you retire (taxes, and potential early withdrawal penalties). But build your after tax savings as well and build that into your budget – you’ll be happier when a portion of your future withdrawals aren’t fully taxable.
Pre-tax savings go to your IRA, 401k, or deferred compensation plans. The contribution limits aren’t changing dramatically for 2014. And if saving has been challenging (e.g. job cutbacks or kids moving back home), consider increasing your deferrals starting January. Saving $100 per month will accumulate to about $46,200 in 20 years if you’re averaging 6% returns; 30 years of savings grows to about $100,400. If you increase that savings by $20 more a month, it could mean an additional $9,200 and $20,100 over the same periods, respectively.
Watch your debt – Consumer debt rose to $11.3 trillion during the third quarter according to a Federal Reserve Bank of NY report. It was the biggest increase ($127 billion) since 2008. Components included mortgages (up $56 billion), student loans (up $33 billion), auto loans (up $31 billion), and credit cards (up $4 billion). Factors could be the sluggish but growing US economy, the need for increased skills and training, and rising confidence by some households buoyed by rising home prices and retirement account balances. The Commerce Department reported home construction grew to a five year high in November to an annualized rate of 1.09 million units. Locally, the Reno/Sparks Association of Realtors reported that sales prices have remained stable the past five months; however, the October median home price ($215,000) is up 19.4% compared to a year ago.
Rising consumer debt is a double-edged sword. Consumer spending is the largest driver of our economy. However, more debt, and/or higher costs to service that debt (from rising interest rates or fees) risks your ability to adequately save for retirement. Meet with your lenders and “fix” adjustable rate debt (ARM mortgages, equity lines, lines of credit, etc.) where possible – a 2% rise in interest rates on $100,000 will increase your monthly payments by about $167. And homebuyers are likely to see higher borrowing costs from increased fees on government-backed loans. The hike in guarantee fees by Fannie Mae and Freddie Mac take effect in March and the rates are based on creditworthiness – borrowers with low credit scores or down payments under 20% will likely pay more).
Celebrate your accomplishments and check your course – Many businesses have completed their annual budget and strategic and marketing plans for 2014. Households are advised to run their finances like a business as well. Uncertainty will always persist (economic, political, markets, your longevity, etc.). However, the stakes are high – your goals and your future – and best you get all stakeholders at the planning table (your spouse and advisors) to help you think things through, set priorities, and adjust contingency plans.
Financial planning and a preparing for a scrumptious holiday celebration with your family share a common thread. You expect the best, plan for the worst and brace for surprises. Happy holidays and may you have a healthy and peaceful New Year.