Your Investing Life: Going back to work
September 03, 2013
You've made the decision to start working again after a break. You've probably got a list of changes to prepare for—getting used to a different schedule, coordinating commuting times, learning new duties. One thing that might not be on your list (but worth adding): Your investment and financial plan. A few simple steps can help you balance financial and investing tasks along with your new responsibilities.
Take advantage of opportunities to save and invest
Reentering the workforce opens up some options to boost your savings and investments. Consider two areas in particular: retirement savings and emergency savings.
Your family life. Your work life. Your investing life.
When "life happens," your financial and investing plans can sometimes get moved to the back burner. These articles can help you bring your investing life—and its effects on your (and your family's) financial future—back to the forefront.
If your employer offers a retirement plan, such as a 401(k) or 403(b), take advantage of it to help build a nest egg for your future. Pre-tax contributions lower your taxable income and reduce your tax bill.
You'll have to choose investments for your retirement account, whether it's through your employer's retirement plan or an account you set up for yourself. When you do, consider following these sound investing principles:
1. Have clear investment goals that make sense for your situation. What kind of lifestyle do you want after you retire? Is it reasonable based on the amount you're saving for retirement, the risk level you're comfortable with, and how long you have until you retire?
2. Pick your mix of asset types (stocks, bonds, and cash) based on those goals, and choose mutual funds in combinations that give you a lot of diversification. (Some all-in-one funds, such as the Vanguard Target Retirement Fund series, and balanced funds can help simplify diversification efforts.)
3. Keep costs as low as you can. Compare the expense ratios, along with any fees, for each of the investments you're considering and pick those that put more of your money to work for you.
4. Don't let hype distract you from staying focused on the long term.
Many employers allow you to contribute to their plans through payroll deductions. If you work for a company with automatic enrollment in a 401(k) plan, "It's worth the effort to check the contribution rate and, if you can, increase it," Vanguard blogger Charu Chander Gross wrote in a 2011 post.
To help boost your retirement savings even more, check how much of your contributions your company will match and aim to contribute at least that much. Ms. Gross also recommends that you consider setting up a traditional or Roth IRA if you don't have a 401(k) or 403(b) available.
You may already have an emergency fund to handle life's little surprises—a leaky window, car trouble, or an unexpected medical bill. Now that you've got some more money coming in, consider using a portion of it to fluff up your emergency cushion.
"We recommend that you put aside between three and 36 months of living expenses for your emergency fund, and that you think about that cash differently from your long-term portfolio of stocks and bonds," said Sarah Hammer, a senior investment analyst at Vanguard. "The size of your emergency fund depends on your personal circumstances—things like how regular your income is and your risk tolerance."
Explore other benefits your employer may offer
Your employer may offer some additional benefits that can make a difference in your financial life.
Your employer may offer health insurance, which can be confusing, especially if you have a lot of choices available. Consider getting help from a plan provider or benefits representative if you're unsure which choice fits your circumstance. If you have insurance available from more than one source, have just one primary policy and designate the other as secondary. Having two primary policies can lead to confusion when you file a claim.
Flexible spending accounts
If available, sign up for a flexible spending arrangement, which lets you put aside up to $5,000 of pretax income to pay for qualified child care or health care expenses. It also lowers your taxable income, shrinking your tax bill at the end of the year. Make sure to use the funds by the end of each year; these "use-it-or-lose-it" accounts prohibit you from carrying over any balances into the next plan year and your employer can't refund the money to you. (You may have until March 31 of the following year to use the funds if your employer's plan has a grace period.)
Create a personal financial center
Set aside an area at home where you can keep documents, such as statements and receipts. Organize them by category, company, and date to find what you need more quickly. Consider storing your important financial documents in a secure location, such as a lock box or safe deposit box at your bank.
Your computer or mobile device can be your financial center. Setting up electronic payments for your bills can save you time. You can make these payments on demand or schedule them regularly if you're confident you'll have enough money in your account to cover them. Right after a pay date is a common time.
Automating your saving and investing activity is another way to simplify and centralize your financial life. There's plenty of scheduling flexibility. Automatic savings transfers can be set up monthly, bimonthly, quarterly, semiannually, or annually, so choose the one that works for you, based on your pay schedule and budget.
Create or adjust a household budget
Along with the income you'll now be earning, you'll likely have some additional expenses, such as child care, transportation, or clothes for work. Having a budget makes it easier to stay on top of expenses, plan for purchases, and prevent your hard-earned money from evaporating from your wallet. Adjust your budget as your income changes or expenses rise (or fall). You might be able to deduct certain expenses from your tax return; review them each year so you don't miss out.
Be aware of any tax implications from your additional income
Adding your income to your budget can be great, but it can also affect your tax situation. Here are a few things to keep in mind:
- Marriage penalties and bonuses: If you're married, the addition of your income along with your spouse's might be enough to push you into a higher tax bracket. Check your tax rate, as well as the standard deduction(s) available to you, and set your withholding accordingly. The income table changes each year; it's available at irs.gov.
- The child and dependent care tax credit: You can receive a tax credit when you spend up to $3,000 in child care costs for a single child or up to $6,000 for two or more children. (Any amount higher doesn't qualify for this credit.) Your gross income determines the credit you can receive. The IRS doesn't allow you to file for a child care credit and use a flexible spending account at the same time, so you'll have to assess which option makes better sense for you.
- Claiming dependents: To get the child tax credit, you'll claim your child as a dependent. However, you can only claim a dependent on one person's taxes. If you're married, talk with your spouse to decide which of you should claim the dependent. The decision will affect your paycheck withholding, as well as your tax return if you're married and filing separately. If you're divorced and share custody, you'll need to work out with your ex who claims your child as a dependent if it's not addressed in your custody agreement.
Don't forget life insurance
Life insurance protects your family in the event of your death. The amount of life insurance that makes sense for you and your loved ones depends on your particular situation. Some things to think about when you're evaluating a policy include how much income your survivors will need to replace your earnings now and in the future, along with what additional costs (child care, outstanding debt, a mortgage, or medical expenses) your heirs might need to cover.
- All investing is subject to risk, including the possible loss of the money you invest.
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
- When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
- Diversification does not ensure a profit or protect against a loss.
- We recommend that you consult a tax or financial advisor about your individual situation.
- Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- For more information about Vanguard funds, visit Funds, Stocks, & ETFs or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.