The kids are old enough to drive themselves to band practice, and you're planning an anniversary getaway with your spouse. Life is good. But college bills loom, and you're neglecting your retirement accounts as you sock away money for college.
Beef up investing. Saving for retirement is the priority. First, max out contributions to your workplace retirement plan. In 2016, you can contribute up to $18,000 to a 401(k) or similar employer-provided savings plan (or $24,000 if you're 50 or older). But be careful. If you stash all of your retirement savings in tax-deferred accounts, you could find yourself facing a big tax hit when you retire, says Jon Meyer, a CFP in Minneapolis. Withdrawals from 401(k) plans and traditional IRAs are taxed at your ordinary income tax rate.
If you aren't contributing to a Roth IRA, this is a good time to start. Contributions are after-tax, but withdrawals are tax- and penalty-free as long as you're at least 59½ and have owned the Roth for at least five years. In 2016, you and your spouse can each stash up to $5,500 in a Roth ($6,500 if you're 50 or older) if your adjusted gross income is $184,000 or less; if your AGI is between $184,000 and $194,000, you can contribute a reduced amount.
Taxable savings accounts will also help minimize your tax bills in retirement. Most investors pay 15% on long-term capital gains and dividends; investors in the 10% and 15% tax brackets pay 0%. Choose tax-efficient index funds or actively managed funds with low turnover to hold down your tax bill even further, Meyer says.
Save at least enough in your retirement plan to take full advantage of the company match. After that, says Meyer, the breakdown between taxable and tax-deferred accounts depends on your tax bracket. Workers in lower tax brackets are better off diverting some of their savings to a Roth and taxable accounts because the immediate benefit of tax deferral is less valuable. If you're in a high tax bracket--say 35%--sock away as much as you can in tax-deferred accounts because you'll probably be in a lower tax bracket when you take withdrawals.
It is also an excellent time to sit down with a financial planner and review your investment mix. Over long periods, stocks deliver higher returns than bonds. You need a healthy share of stocks and stock mutual funds in your portfolio to build a nest egg that will last 30 years or longer.
Juggle saving for college and retirement. It's tempting to put retirement savings on hold in order to give your children the best college education that money can buy. But financial planners are nearly unanimous in their belief that this is a bad idea.
The reason is simple: You (or your children) can borrow for college, but you can't borrow for retirement, and it's difficult to make up for lost time. Working longer isn't always an option: Many people are forced to retire earlier than they planned because of health problems or corporate downsizing. If you reach retirement and you've saved more than you need, you can help your children pay off their student loans, says Andrew Houte, a CFP in Brookfield, Wis. Plus, "it's not the worst thing in the world for your kids to have some skin in the game," says Houte.
Max out your earnings. Remain technologically nimble, even if you don't work for a high-tech company. There are plenty of online courses you can take to improve your social media and digital skills. Constant Contact offers online seminars (some of them free) on how to use social media for a variety of business purposes. Many local community colleges and university extension offices provide courses designed to enhance your digital skills. You can find YouTube videos on everything from computer coding to Adobe Photoshop.
Don't focus just on how much money you take home every week. Make sure you're taking advantage of employee benefits that could build wealth and contribute to your retirement security. Does your employer match contributions to a health savings account? Offer retiree health benefits? A pension? Houte says some of his clients have switched jobs---and even taken a pay cut---in order to work for an employer that provides better retirement benefits.
Pay off debt. Retiring mortgage-free is a worthy goal. You'll eliminate one of your largest expenses, which means you won't be forced to take large withdrawals from your retirement savings during market downturns to pay the bills. But at this point in your life, there may be better uses for your money, especially if you have a mortgage with a low interest rate. Focus on paying off debt with higher interest rates, such as credit card balances and parent college loans.
If you still have money left over, consider accelerating your mortgage payments. You could refinance to a 15-year mortgage, or you could simply make extra payments on your current mortgage. You'll pay the equivalent of 13 monthly payments instead of 12 by dividing your payment by 12 and adding that amount to each monthly bill. Or you could simply make an extra payment at year-end. On a 30-year mortgage, making an extra monthly payment each year would reduce the term of your loan by about four years.