When you're paying for mortgages, marriages and lessening accumulated debts, saving for retirement may seem improbable - or even impossible - but it is still an important part of fiscal responsibility. Individuals aged 25 to 34 generally include those who have been able to determine their savings and spending patterns and those who are just starting to take control of their fiscal responsibilities. If you're in this age group, you probably know all about the financial learning curve it represents - it's a time of reassessment and correction for many young people as they determine how to balance their budgets. In this article we'll focus on some of the areas of financial planning that could impact those between the ages of 25 and 34 as they struggle to add to their retirement nest eggs. (Not in this age bracket? See Savings Plans For Minors, Retirement Savings Tips For 18- To 24-Year-Olds, Tips For 35- To 44-Year-Olds, Tips For 45- To 54-Year-Olds, 55- To 64-Year-Olds and 65-Year-Olds And Over.)
Individuals within the 25 to 34 age group may have already conducted a financial analysis at an earlier age. However, regardless of whether you've already done this, a reassessment must be done periodically to determine whether changes must be made to your financial habits, including those that affect your budgeting and debt analysis. The frequency with which a financial analysis must be done will vary among individuals, and may also be affected by other factors, such as changes in interest rates, fiscal responsibilities and recurring expenses. For instance, if the interest rates on mortgages have been reduced since an individual received a mortgage loan, it may make sense to determine whether the mortgage should be refinanced. Also, if the individual's marital status has changed, retirement goals may need to be redefined. (To read more, see The Reverse Mortgage: A Retirement Tool and Revealing The Hidden Costs Of Weddings.)
Tip: A financial analysis is a necessity and is one of the most important steps toward identifying areas in which you are doing well and areas in which improvements are required. It may be worthwhile to have the analysis done by a competent financial professional.
Refinancing a Mortgage
Refinancing a mortgage can be advantageous, provided it either increases the individual's available cash by lowering the monthly payments, or reduces the amounts paid for interest over the period of the mortgage. In most cases, individuals should refinance when the current interest rates on mortgages are lower than the interest rate that they are receiving on their current mortgage. Reasons for refinancing include the following:
- Lowering the amount paid each month (or other frequency). An individual, who pays less for a mortgage on a monthly basis will likely have the difference available for use in other areas, including increasing the amount contributed to a retirement account.
- Consolidating debts. This could be ideal for someone with multiple credit cards and other forms of credit, especially if the interest rate on those amounts is higher than the interest rate for the mortgage. However, close attention must be paid to the total amount of interest that will be paid over time on those amounts. For instance, stretching a credit card balance over 30 years will cost much more than if it is paid off earlier. On the other hand, the reduction of monthly payments could increase the amounts available for saving. A projected financial analysis should be done to determine which would be more costly. (To read more, see Digging Out Of Personal Debt and Understanding Credit Card Interest.)
Individuals who refinance their mortgages may want to shop around for the lowest interest rate and closing costs - even a 0.5% percentage difference will result in a significantly greater expense to the borrower, leaving less cash available for other uses. (For more information on mortgages, see Shopping For A Mortgage and Mortgages: How Much Can You Afford?)
Tip: Most 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. Remember, the odds of receiving a favorable response are 50%!
Debt consolidation usually involves consolidating multiple loans under the umbrella of the lowest (or a lower) interest rate, which can sometimes shorten the repayment period. The goal of debt consolidation is usually to reduce the overall amount of interest paid on credit and the amounts paid in installments.
Caution: If the consolidation involves multiple credit cards, it may be an indication that the individual needs professional assistance with managing debt. For more information on debt consolidation, see the Federal Trade Commission's website.
If the solution includes closing credit cards, the individual should seek advice on how this would affect his or her FICO score. (To learn more about your credit score, see Take Control Of Your Credit Cards.)
As your balance sheet and cost of living changes, so does the need to reassess your budget. The rebudgeting process will help you determine whether you should cut back on some expenses, or perhaps even whether you require additional income to maintain the standard of living you expect. A revision of the budget will help you to make important decisions relating to retirement savings, such as whether to increase or decrease the budgeted amount that you add to your nest egg.
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 areas of finance are part of the full retirement package, and will have an effect on your nest egg. For instance, if you have excessive credit card debts, it may make sense to reduce the amounts budgeted for retirement contributions and redirect more to credit card payments. You should consult a financial planner for assistance in determining the optimal means of splitting available amounts between credit card payments and retirement plan contributions. (For more on budgeting, see The Beauty Of Budgeting and The Indiana Jones Guide To Getting Ahead.)
Tip: Retirement savings should be treated as a recurring expense. This helps to make sure the amount is saved regularly, making it easier to add to your nest egg. If your employer offers contributions via tax-deferral or after-tax payroll deductions, you should take advantage of this opportunity to increase your savings. After all, it's easier to treat the amounts deducted from a paycheck as non-disposable income, and there is a lower risk of the amount being used for other purposes.
Tax Filing for Married Individuals
There are many financial benefits available to individuals 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 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 better 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. (For more on this, check out The Benefits Of Having A Spouse.)
Tip: IRA contributions for the year can be made from January 1 of the tax year up to April 15 of the next year, and can be made even after the individual has filed his or her tax return. If the decision is made to contribute to an IRA at the time the tax return is being filed, the tax preparer reflects the amount on the tax return - if applicable.
Note: Effective for tax years beginning 2007, individuals may use their tax refunds to make IRA contributions via direct deposit. See IRS Form 8888 at www.irs.gov.
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. As such, the actions that are recommended for 30-year-olds may also be recommended for 50-year-olds, depending on their personal situations. 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 financial planner.