By Judy Loy
Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.
For financial planning, many individuals and families have short- and long-term goals that can compete for money and time. In addition, everyone’s goals are different and changing. Some families have children they wish to put through college without loans and others want their children to do it on their own for some “skin in the game.” Some individuals only have themselves to depend on and want to feel secure in retirement.
All choices are valid and sometimes priorities conflict when time or money is limited. The more time you have to save for a goal the less you need to save due to compounding. The shorter the time or the bigger the goal, the more money may need to be geared toward that goal. The more conservative you are investing, the more time and/or money you may need to save. In every financial decision there is a give and take.
I have a few general pointers and advice that can clarify common questions. However, remember, all choices are valid and the decision is ultimately yours. It depends on your situation and ranking of goals.
A common question is: Do I save for retirement or do I put more money down to pay off my mortgage early? It depends. First, look at the interest rate on your mortgage, which in this environment should be low. Next, what is your breakdown between stocks and bonds and anticipated return on investments? Going strictly by return possibilities, right now investing beats paying down a mortgage. To pay down your mortgage is more conservative because the interest rate is guaranteed, and you are “investing” at the low rate of your mortgage. For instance, paying on principal on a 30-year mortgage at 3% is like investing in a bond at 3%. Given the increase in the standard deduction, most people use that deduction and no longer itemize, meaning your mortgage is no longer helping you tax-wise. If you are invested in cash, which is earning less than 1%, the answer is put money toward the 3% mortgage. If you are looking at putting money from your paycheck into a stock mutual fund inside your 401k at work with a match, the answer is put the money into your 401k. You would get a tax deduction for the contribution, over time the return on the stock mutual fund should be higher than 3% and you get a match from your employer.
I do have one piece of advice that I suggest to my clients and that is to have the mortgage paid off at retirement if possible. Typically, a mortgage payment is a large expense for a household and eliminating that will lower the money needed through retirement. For this, we work through numbers to be sure if they wish to retire at 65, we are doing a monthly payment that will pay down the mortgage by that time.
Another question: Should I put money toward my retirement or into a 529 for my child’s college? If it is a one-or-the-other question, I would suggest putting money toward retirement. Your child may not go to college and there are loans available to pay for college. There are not loans available to put you through retirement. On the other hand, if you have money available for both, you can run calculators and see what makes sense for both. You could choose to retire later or not travel as much in retirement, so that you could put more toward your child’s college fund.
Financial planning is never a one and done. People change jobs, divorce, marry, have kids and are not stagnant. Your goals and plans should adjust to your ever-changing lifestyle. A financial plan should be checked and changed regularly to reflect reality.
Between mortgage payments, college savings and retirement goals, every choice is a personal one. Be sure to find an expert that will work through numbers with you so you can make the informed decisions towards your many goals.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions.
