SPECIAL REPORT: Smart money moves at different life stages

By: Kimberly Lankford

Making some key financial moves at each life stage can help you take advantage of special benefits, make the most of tax breaks, protect your family and your savings, and reach your long-term financial goals.

First Job

When you get your first job, it’s important to make the most of your employee benefits and other tax-advantaged perks that can help you stretch your income and reach your long-term goals.

— Start contributing to a 401(k) or other tax-advantaged retirement-savings plan through your employer. You can contribute up to $19,000 to a 401(k) in 2019, which may seem like a lot of money if you’re just starting out. But even making small contributions when you’re young can grow significantly by the time you retire. Find out if your employer matches your contributions and try to at least take advantage of the full match — that’s free money. And try to increase your contributions whenever you get a raise or some extra money.

— Decide whether to contribute to a traditional or Roth version of the 401(k). Traditional 401(k) contributions will lower your taxable income now but be taxed when you withdraw the money in retirement. If your employer also offers a Roth 401(k) option, your contributions are taxable but your withdrawals will be tax-free — which is usually the best bet if you think your tax bracket will increase by the time you retire.

— Make the most of other tax-advantaged ways to save. If your modified adjusted gross income is less than $137,000 if you’re single, or $203,000 if you’re married filing jointly, then you can contribute to a Roth IRA (the amount you can contribute to a Roth starts to phase out if your income is more than $122,000 if single or $193,000 for joint filers in 2019). This can be a good option if you don’t have a 401(k) at work, and can also be a good way to supplement your 401(k) contributions if you can afford to do both. Contributions to a Roth IRA don’t lower your taxable income, but you can withdraw your contributions without taxes or penalties at any time — which you can use for any reason, such as a house down payment or as an emergency fund — and then you can withdraw the earnings tax-free after age 59 ½ (as long as you’ve had a Roth for at least five years). If you have any income from self-employment — even just some freelance or gig work on the side — you can contribute to a self-employed retirement plan, such as a SEP or a solo 401(k), which can reduce your taxable income and grow tax-deferred for retirement. See IRS Publication 560 Retirement Plans for Small Business for more information.

— If your employer offers several heath insurance options, consider the premiums, deductibles and out-of-pocket costs when choosing the plan. Also factor in whether your employer contributes to a health savings account if you choose a high-deductible plan (large employers contribute an average of $632 to their employees’ HSAs in 2019, according to the National Business Group on Health). If you’re young and healthy, contributing to an HSA can be particularly valuable because you get a triple tax break and there’s no time limit for using the money. Your contributions lower your taxable income, the money grows tax-deferred and it can be withdrawn tax-free anytime in the future for out-of-pocket medical expenses. Unlike flexible-spending accounts, you don’t have to withdraw the money by the end of the year. See Six strategies to make the most of a Health Savings Account for more information.

— Give yourself an insurance check-up. Your car insurance may be one of your largest expenses, but you can reduce your premiums by increasing your deductibles, shopping around for the best deal, and taking advantage of all of the discounts you can get. If you rent an apartment or house, consider getting renters insurance to protect your possessions and protect yourself from liability. You usually get a discount if you buy your car and renters insurance from the same company.

Starting a Family

When you get married or have children, you’ll need to do more to protect your finances and your income. You also become eligible for some special tax breaks and can start saving for your kids’ future college expenses, too.

— Now that someone is depending on you financially, it’s important to consider life insurance, so your family can continue to pay the bills and save for the future if you die and your income stops. Even if you don’t have kids yet, you may want to get life insurance if your spouse depends on your income to help pay the mortgage. See Life insurance check-ups for every life stage for more information. Also consider whether you need disability insurance, which can help you and your family pay the bills if you become sick or injured and can’t work. See The basics of disability insurance for more information.

— Coordinate employee benefits. If both spouses have health insurance at work, consider all options when picking a plan — each spouse could stay on their own employer’s policy, with the kids on one plan, or both spouses and kids could be covered by one employer’s policy (although some employers charge a surcharge if your spouse could get coverage through his or her employer and doesn’t). Consider premiums, deductibles, out-of-pocket expenses, and whether the doctor and hospitals you want to use are covered in the insurer’s network.

— Make the most of other tax-advantaged perks. Contribute to a health savings account if you have a high-deductible health insurance policy, or consider a health-care flexible-spending account if you have a low-deductible policy — you can contribute up to $2,700 pre-tax to an FSA in 2019, which you can use tax-free for out-of-pocket medical expenses. But unlike with HSAs, there is deadline for using the FSA money — you either have to use the money in the account by the end of the year, or by March 15, or some plans let you roll over $500 from one year to the next. It’s important to do a rough estimate of your out-of-pocket medical expenses before deciding how much to contribute to an FSA for the year.

— Take advantage of tax breaks for families. If you have children under 13 and you and your spouse work, you can contribute up to $5,000 (per family) to a dependent-care FSA, which lets you set aside pre-tax money that you can withdraw tax-free for childcare costs, including preschool, daycare, before-school or after-school programs, or even summer day camp. Or you may be able claim the child-care tax credit for those expenses. See the IRS’s Child and Dependent Care Credit factsheet for more information.

— Start saving for college. Almost all states offer 529 plans, which you can use tax-free for college tuition, room and board and other expenses at any college in the U.S. and even some in foreign countries. About two-thirds of the states offer state income-tax breaks for residents who contribute to their own state’s plan (and a few states offer a break for contributing to any plan). See Savingforcollege.com for more information about each state’s rules.

— Continue contributing to your 401(k) at work and a Roth IRA, if eligible. By making these contributions automatically, the money is invested before you have a chance to spend it elsewhere, which can be particularly helpful when you’re juggling multiple priorities with young children.

— Do some basic estate planning. If you have kids, it’s important to have a will, designate a guardian for your children, and make sure the beneficiary designations on your retirement plans and life insurance policies are up to date.

Peak earning years

Your income may be rising and your kids may be on their own, so your priorities may change. You may have more money to set aside for retirement, but less time to get there. Make the most of the extra opportunities to save and assess where you stand to reach your retirement goals.

— Ramp up retirement savings. After you’re no longer saving for college or supporting your kids, you may have more money to save. This is the perfect time to take advantage of catch-up contributions to your 401(k) and IRA. If you’re 50 or older in 2019, you can contribute an extra $6,000 to your 401(k), boosting your total contributions for the year to $25,000. And you can contribute an extra $1,000 to your IRA if you’re 50 or older in 2019, boosting your total IRA contributions to $7,000 for the year.

— Run your numbers through a retirement-savings calculator to make sure you’re still on track to reach your goals. You still have some time to make adjustments if it looks like you’re falling short — such as saving more or working longer. As you get closer to retirement, you can estimate your retirement expenses more precisely than you could in the past.

— Protect your retirement savings from potential long-term care expenses. Even though it might be decades before you need care — and you may not end up needing long-term care at all — it’s important to consider how you may pay for those potentially large costs when planning for retirement. After your kids are on their own, you may have more money available to pay premiums for long-term care insurance or a hybrid life insurance/long-term care policy, or to set aside extra savings to cover the potential costs. You may have better coverage options in your 50s or 60s than you would if you wait until you’re older. For more information, see How to decide if long-term care insurance is for you.

— If your kids have grown up and are now supporting themselves, it may be a good time to reassess whether or not you still need life insurance. If you have a permanent life insurance policy, consider whether you could benefit from making a tax-free exchange from your life insurance into an annuity or long-term care insurance. See What to do with life insurance you no longer need for more information.

At retirement

When you retire, your financial focus changes from accumulating savings to preserving retirement income. You’ll also need to make some important decisions to make the most of your Medicare and Social Security benefits.

— Make key Medicare choices. If you’ve retired, you’ll have to sign up for Medicare at age 65. If you’re still working and have health insurance through your employer, you may be able to decide whether to sign up for Medicare at age 65 or to wait until you retire. Medicare Part A, which covers hospitalization, is free for most people and they usually sign up at 65 even if they’re still working (unless they want to contribute to a health savings account). Part B costs $135.50 per month for most people in 2019, and if you have health insurance from an employer that has 20 or more employees, you can delay signing up until you retire. Medicare leaves some gaps, so you may also want to sign up for a Medicare supplement plan and Part D prescription-drug coverage, or you could get a Medicare Advantage plan that provides both medical and drug coverage. See Get Started With Medicare for more information about the process and your options.

— Make a plan for Social Security. You can start receiving Social Security benefits as early as age 62, but your benefits will be reduced by as much as 30% for your lifetime. You can get full benefits at age 66 if you were born from 1943 to 1954 (with the full retirement age gradually increasing by two months every year, until it reaches age 67 for people born in 1960 and later — see the Social Security Administration’s normal retirement age table. Or your benefits will increase by 8% per year for every year you delay taking benefits past full retirement age until age 70. See the Social Security benefits calculators to help run the numbers on the different options.

— Have a retirement-income strategy. If you’ve been saving for years in a 401(k), IRA or other tax-advantaged retirement-savings plans, start thinking about how you’ll tap that money and how much you can safely withdraw each year. If some money is in tax-deferred accounts and some in tax-free savings (such as a Roth), consider the tax ramifications of your withdrawals when deciding which accounts to tap. Also consider whether you want to create a guaranteed income stream to cover your regular expenses. You may have some income from a pension, and you can invest some of your retirement savings in an income annuity that will pay out for your lifetime. See Picking the right income annuity for more information about your options.

After retirement

You may still have a few different life stages even after you retire and more decisions to make to get the most out of your benefits, make sure you don’t outlive your savings, and help pass your assets on to the next generation.

— Calculate whether your savings are still on track to reach your goals, especially after you’ve been making withdrawals for a few years. Also consider potential expenses that may increase later in retirement, such as health care and long-term care costs.

— Reassess your Medicare options. You can choose a Medicare Part D prescription-drug plan or Medicare Advantage plan every year during open enrollment, which runs from October 15 to December 7. It’s particularly important to check out of all of your plan options again if you’ve developed medical conditions or take new medications, or if new plans become available in your area.

— Start preparing to take required minimum distributions from your tax-deferred retirement savings, such as your 401(k) and traditional IRA. After you turn age 70 ½, you’ll have to withdraw a certain amount of money from your accounts each year, based on a life expectancy factor from the IRS. See IRS Publication 590-B for more information.

— Start thinking about your options if you need long-term care. Would you like to have care in your home, or is there an assisted-living facility that you would prefer? It can help to let your children or other family members know, so they won’t have to guess your wishes in an emergency. Also let them know if you have long-term care insurance or other plans to help cover the costs. It’s also a good idea to have a health-care proxy designating a relative or other trusted person to make medical decisions on your behalf if you can’t do so yourself.

— Review your estate plans. Take a look at your will and beneficiary designations again. You may now have grandchildren you’d like to help, or may be in a position where you can afford to give money to a charity.

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