Retirement tips for mid-career savers

Making adjustments

From a life-goal perspective, mid-career is a good time to take stock of what you've achieved and what you still hope to accomplish in your life. If you live paycheck to paycheck, run up credit card balances, and can't seem to use today to work toward tomorrow, then it's time to rethink your financial life plan and create or update your spending plan.

Reflect a moment

• Take stock. • What have you done? • What do you want out of life? • How can you get it?

I don't like to call a spending plan a budget because, like dieting, no one likes to budget. Adopt the mindset that you're allocating income between current spending and investing for future goals. That makes the process a lot more palatable.

One thing the budgeters have right is the need to pay yourself first. Fund the retirement account, college savings plan, vacation fund, etc., off the top. That presumes that you can stay current on your bills and manage current consumption, too.

You don't have to "lose the latte" to reach your financial life goals, but you do have to strike a balance between current and future consumption. With the possible exception of the time spent getting an education, financing current spending with future income is a losing proposition.

Benjamin Franklin once said, "Beware of little expenses. A small leak will sink a great ship." You get to decide where the leak is in your financial ship of state.

Ask yourself once more with feeling, "What do I want out of life and how can managing my finances help me achieve it?"

Clearing debt

In a perfect world, at mid-career you should be at a point where you are current on your credit cards, student loans have been paid off for awhile, and your only outstanding debts are your mortgage and maybe a car loan. You have an emergency fund or enough flexibility in your investment portfolio to have ready access to cash, or you have a home equity line of credit that you can tap in a financial crisis.

Spending less than you earn makes it possible to work toward your future. Taking all of this year to pay off last year's holiday spending puts you in the position to do the same thing again for the upcoming holiday season.

A common financial question mid-career is whether investment balances should be used to pay down or pay off the mortgage. Conceptually, this makes sense if the effective rate on the mortgage is less than the expected after-tax return on your investments. Conservative investors will find paying down the mortgage more attractive than less conservative investors, because it's hard to invest in CDs that outperform, on an after-tax basis, the effective interest rate on the mortgage.

Paying down the mortgage instead of contributing to retirement accounts concentrates your investment in one real estate investment: your home. It's an especially bad idea if you're forgoing a company match in your 401(k) or 403(b) account to make those additional principal payments.

If you are paid weekly, or biweekly, you have at least two months a year when you get an "extra" paycheck. That money can be used to make additional principal payments on the house, invest for a future life goal or create an emergency fund.

Adjust portfolio

Periodically rebalancing your portfolio to bring it back in line with your target asset allocation is a smart thing to do on a regular basis.

Choose a target asset allocation based on your investment goals, your planning horizon and your risk tolerance. If you aren't comfortable investing long term in the stock or bond market and put all your money in insured bank deposits, it's likely that you'll have to save a higher percentage of your income to reach your financial goals for retirement.

Let's say your target asset allocation is 70 percent stocks, 25 percent bonds and 5 percent cash. A run-up in the bond market puts you at 60 percent stocks, 35 percent bonds and 5 percent cash. Rebalancing takes you back to your target asset allocation. With a taxable account, in the interest of being tax efficient often it can make sense to steer new contributions into an asset class rather then sell holdings to rebalance. Being disciplined about rebalancing can keep you from staying over invested too long in a particular category. As a rule of thumb, an annual portfolio review makes sense even if you choose to rebalance less frequently.

The current fashion in asset allocation is to let the money manager do it for you. Asset allocation for target-date and lifecycle funds is managed professionally. With these funds, the targeted asset allocation is managed to a planning horizon, say 2020, so that the portfolio's risk profile becomes more conservative as that date approaches. Lifestyle funds take a different approach, investing in a risk/reward profile that stays constant over time and rebalances to stay in line with that profile. Neither type of fund should be regarded as a one decision, buy-and-hold investment. It's important to review performance occasionally to determine if the investment serves your needs over time.

Hire a planner

By mid-career you may already have a professional relationship with an accountant, an insurance agent, an investment professional and possibly even an attorney. The question becomes, why add a financial planner to the mix?

A financial planner can give you a comprehensive financial life plan versus a hodgepodge of financial products and services that may or may not be working in tandem to help you achieve your financial goals.

Since it's also likely that some or all of the professionals you're currently working with offer financial planning services, you need to make a decision about whether you're comfortable letting one of those professionals take the lead or if you want to bring in a planner to oversee the process.

You need to be confident that the professional you hire to do your financial planning is acting as a fiduciary in managing your plan and assets rather than being self-serving in what they recommend you to do with your income and investments.

Interview professionals for this spot on your financial team. If they don't have the time, then keep recruiting. The Certified Financial Planner Board of Standards has an online guide, "Checklist for interviewing a financial planner" and a listing of financial services credentials that will help you decipher the alphabet soup of credentials in the planning profession.

College or retirement

If you are raising children, then the cost of educating your children becomes a variable in your financial life plan. Parents typically are willing to sacrifice quite a bit when it comes to meeting their children's needs and that's especially true when it comes to education. Whether it's private schooling K-12 or funding one or more college degrees, parents can see a high percentage of their income go toward their children's education.

Consider your resources

• Will your kids help you through retirement? Don't count on it. • Will the bank help? Nope. • Make funding retirement your top priority.

But choosing between funding the children's college or your retirement should be an easy decision. Choose to fund your retirement. You can't count on your children to support you in retirement, no matter how broadly you hint that that's the deal they've struck when you sign the tuition check.

The higher income stream earned by a college graduate can finance the loan payments needed to fund that education. The reduced income stream you experience in retirement, either from raiding your retirement portfolio to pay tuition or from not investing for retirement, can't be funded by loans in retirement.

The ideal situation would be to start early enough in investing for both goals so you don't have to decide between one or the other. Tax-advantaged college savings approaches abound between Section 529 college savings plans, Coverdell education savings accounts, and the U. S. Treasury's savings bonds for education program (although the latter is limited by the parent's modified adjusted gross income). Financial aid, scholarships and tax credits also play a role in funding Junior's education.