When it comes to building assets for retirement, there are basically two primary levers you can pull: the savings lever and the debt lever. You need to be pushing up on the savings lever and down on the debt lever. Everything else is secondary. You've got to get those two things moving in opposite directions.
Saving Rate. You can't get anywhere with your retirement plans unless you save adequately each year. Your annual savings goal should be at least 12% to 15% of your pre-tax income (so if you make $100,000, you should be saving at least $12,000 to $15,000 a year). If you do nothing else this year, work on increasing your savings rate.
- Be sure to take advantage of any 401(k) match you get at work to help reach these goals. For instance, if your employer matches 3% of pay, be sure to at least contribute enough to capture the match.
- The savings rate in America is about 4%, so not many people are anywhere near the 12% to 15% goal.
The best way to reduce debt is to work down your highest interest rate debt first, and that is usually credit card or other types of consumer debt. Get yourself setup on an automatic payment plan to make additional principal payments on the balance. Even $25 or $50 a month will help.
If you don't have any high interest debt, then start working down the mortgage. Figure out how many years you have until your anticipated retirement date, and get yourself on a plan to have your mortgage paid off by then. There are lots of online calculators you can use to figure out how much extra principal you need to add each month to be debt free by your retirement date. I like the ones at www.dinkytown.net.
If you haven't done so already, look into refinancing your mortgage to bring down the interest rate. Often, if you can reduce the rate by 1% and plan to stay in the house for a number of years, it can be a good deal. And, if you're in the house you want to retire in, then refinancing may be a real good deal. As you lower your interest rate, that gives you the ability to add more money to principal and get the loan paid off faster. Rates are well under 5% right now, so consider taking advantage of them.
If you've made some progress this year on the savings and debt front, then also consider straightening up some loose ends, like insurance.
Insurance. People often carry all sorts of miscellaneous or old insurance policies that they really don't understand, may not need, or could get a better deal on if they got out there and shopped around. This can be true with life, auto and home insurance.
You might be surprised how much money you can save. For instance, life insurance rates continue to decline. If you're healthy, you should consider applying for new coverage. The new coverage may be cheaper than the coverage you took out several years ago. Or, maybe you don't need as much coverage. You could consider a new policy with lower rates and lower coverage.
The point of doing a mid-year checkup is to make sure you're getting ahead financially in 2010. The months fly by quickly, and before you know it, you'll be planning for the holidays and saying, "well, I'll get to my 401(k) deferrals next year."
Bottom line. Pick one of these items to improve and do it before the summer ends. You'll feel good about yourself.
Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.