Many may be glad to see 2009 leave and take the bad recession with it. For those who make New Year’s resolutions every year and want to improve their financial picture in 2010, William Even, the Raymond E. Glos Professor of Economics at Miami University and a pension expert, has some resolutions for the average investor:
1. Evaluate the adequacy of your savings plan for retirement
“Many retirement calculators available on the Web can help you evaluate the adequacy of your savings plan,” Even says. “You provide information on current assets, income levels, projected retirement dates, etc., and the retirement calculator will tell you if you’re on target with your goals.”
2. Build a savings account for emergencies sufficient to cover living expenses for at least three months
“A three-month cushion is a typical recommendation, but if you are particularly nervous about your job situation, you may want to increase the size of that cushion,” Even says.
3. If your savings plan is inadequate, increase your savings rate over time
“If you have a 401(k) plan through your employer, you can commit to increased saving by adjusting your contribution to the 401(k) plan,” recommends Even. “If you don’t have an employer-sponsored pension, consider pre-committing to saving by having a specified amount transferred into a savings fund every time you receive a paycheck. Some employers offer a ‘save more tomorrow’ plan that allows you to commit a specified share of any pay increase to increased savings.”
4. Examine your portfolio allocation at least twice per year and rebalance if necessary
“Your asset allocation should depend on your risk preferences and age,” Even said. “Asset allocations should be reexamined regularly as there is evidence that most people do not rebalance their portfolios often enough. If you want to consider a passive method for adjusting your asset allocation, consider a life-cycle fund. These funds automatically reallocate your portfolio over time and gradually shift to a more conservative asset allocation based upon the target date that you choose for retirement.”
5. Consider the tax consequences of your retirement savings plan
“If you have access to a tax deferred savings plan (e.g. a 401(k)) through work, take advantage of it and if your employer matches your contributions, be sure to contribute enough to maximize the employer match,” according to Even. “Also, give some thought to the new Roth 401(k) if your employer offers it. The regular IRA allows you to defer taxes on your contributions and investment earnings. With the Roth IRA, you pay taxes on the contributions today, but pay no taxes in the future. Consequently, if you think your tax rate will be higher in retirement than it is now, you should consider the Roth 401(k). If you think the reverse will be true, choose the regular 401(k).”
For more information, contact William Even at 330-0656 or firstname.lastname@example.org.