En español | You may have made — and already broken — several New Year's resolutions. Remember the entire box of holiday cookies you scarfed down in one sitting? But you need to make and keep some financial resolutions as well if you want to enjoy a prosperous 2020 and beyond. Here are five to consider.
Fewer than half of Americans 50 and older have an emergency savings account, according to the AARP Public Policy Institute. Don't be one of the 51 percent who don't. If you're still working, you'll need enough money to keep the lights on if you find yourself in between jobs. If you're retired and have enough income from Social Security and other sources to pay the bills, you'll still need enough to cover annoying yet routine expenses, such as replacing your refrigerator or getting a new set of tires.
To replace money from a job, figure out how much you spend each month. It's not quite as much as you might think, since you won't be contributing to a 401(k) or, for that matter, paying as much in income tax. You'll still need to eat, use electricity, talk on the phone, pay the rent or mortgage and drive.
The next question is how long that money should last. About 45 percent of those unemployed 27 weeks or longer are 55 and over, according to the U.S. Bureau of Labor Statistics. That's nearly seven months. If your vital expenses (minus any other income) are $2,000 a month, you should target about $13,500 for your emergency fund if you can. But even modest emergency savings of as little as $250 can help avert a financial crisis for the most vulnerable households, AARP finds.
This money needs to be there when you need it, and you don't know when you'll need it. Keep it in a savings account, bank money market account or a money market mutual fund. To build the balance, set up automatic transfers into your emergency savings account.
You can contribute a maximum $19,500 to your 401(k) savings plan in 2020, assuming you're still working, plus $6,500 in catch-up contributions if you're 50 or older. If your company matches any of your contributions, that's gravy.
If you're not contributing the maximum — and, let's be honest, most people eligible for catch-up contributions don't — at least try bumping it up 1 percent this year. It may not seem like much, but the biggest single factor impacting how much you'll have when you retire is how much you put in.
Let's say you work for Scrooge & Marley, and your salary is $50,000. You get 2 percent raises each year because, well, you work for Scrooge & Marley. If you contribute 6 percent of your salary every year and earn a 7 percent annual return, you'll have a bit over $48,000 in your account after a decade. If you increase your savings rate by one percentage point a year until you hit 10 percent, you'll have $70,600 after a decade.
Many retirement savers accumulate mutual funds like the sorcerer's apprentice accumulates broomsticks: They just keep multiplying as you change jobs, brokers and outlooks. In reality, you don't need many funds, and having too many — particularly expensive ones — simply hurts your performance.
Think of it this way: If you have 10 U.S. stock mutual funds, you'll probably match a broad measure of the U.S. stock market, such as the Standard & Poor's 500 stock index. But you'll be paying expenses for those mutual funds, which can be as high as 1.5 percent. That's $150 for every $10,000 you invest, about enough for a week's groceries .
You could replace all of those 10 funds with one low-cost index fund, which simply tracks a stock index. Index funds that track large-company stocks charge anywhere from zero to 0.3 percent. Your savings go directly into your pocket.
How many funds do you need? A minimalist approach would be two stock funds (one U.S. and one international), a bond fund and a money market mutual fund. If you stick with low-cost funds and don't pay a commission to buy them, you can add a few more. More than 10, however, is probably unnecessary.
One trick to increase your tax deductions in a year is to make one mortgage payment early. You'll get an extra month's worth of deductible interest. Just keep in mind that you'll need to itemize your tax return to get the deduction, something fewer taxpayers are doing now that the standard deduction has been raised.
However, there's another argument for adding an extra payment every year, if you can afford it, even if you don't itemize. Let's say you have a $165,000, 30-year mortgage at 4.5 percent. Your payment is $836 before taxes and insurance. During the course of the 30 years, you'll pay $135,971 in interest.
If you make one extra payment a year, starting on the second year of your mortgage, you'd pay off your debt 44 months early and save nearly $23,680 in interest.
No matter your age, opening an online My Social Security account with the Social Security Administration is a smart move. It's free, and even if you've yet to claim your benefits, you'll get a personalized estimate of your future benefits based on your earnings to date. You can also request a replacement Social Security or Medicare card online. Once you apply for benefits, you can track your application and set up or change your direct deposit information.
Another big reason to open a My Social Security account is to prevent an identity thief from doing so first. A fraudster who sets up an account could claim benefits in your name or redirect benefits to a bank account that's not yours. Claiming your account now, even if retirement is still years away, deters fraud.
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