Paying off big debts that might have been around for decades is like a financial rebirth because money you once budgeted elsewhere is suddenly yours to keep. The temptation is to splurge on a new car or a dream vacation, but the smart move is to put that extra income to work for you.
The best strategy after paying off your mortgage or student loans is to catch up on your retirement savings, but many people don’t do that, according to a recent Barron’s article. They treat the extra money like a bonus instead of something that can be reinvested elsewhere.
“For most people, once home and college costs are relieved, it’s almost like getting a raise,” Jim Colavita, senior wealth advisor at GenTrust in New York, told Barron’s.
If you just paid off a mortgage and/or student debt, here are some strategies by age group on how to invest it, according to various financial experts:
Your two main goals at this age are to boost retirement savings and pay down any remaining debt, Barron’s reported. A good first step is to increase your contribution to a 401(k) or other employer savings plans. Max out your contribution if you can — or, at the very least, try to contribute enough to get your full employer match.
If you’ve already maxed out your 401(k), consider funding a health savings account available to those with with high-deductible health plans. Contributions to an HSA can reduce your taxable income, and any withdrawals used for medical purposes are tax-free. Additionally, money not spent during the current year rolls over into the next year.
A good target to aim for is to put half of your extra income into retirement accounts. Beyond that, you might consider contributing to an education savings plan if you have kids or grandkids you want to help put through school. A 529 plan will give you tax benefits that can make it easier to pay for private school or college, Forbes reported. Other good uses of your extra money are to pay off high-interest debt and pay for needed home improvements.
If you’re in this age group, it’s time think about when you want to retire. If you plan to keep working for another 10 years or more, you can stick to the same plan as those in the 50-60 age group.
If you want to retire within 10 years, you should start assessing the sources of guaranteed retirement income you have, such as pensions and Social Security, and building a plan to live on a fixed income supplemented by your savings and investments, Barron’s noted. Consult with a financial advisor to see if your funds are properly allocated according to your risk tolerance, retirement needs and ideal retirement age. This is also a good time to weigh whether you need to consider long-term care insurance.
Ages 70 and Above
This is the age when you should start moving your extra income into liquid accounts such as savings and money market accounts. Ideally, you should have a cash cushion of as much as four years of fixed living expenses, minus whatever guaranteed sources of income you have.
If you plan on living in your home forever, now is the time to make accessibility upgrades before you actually need them, according to Forbes. For example, you could put some of your extra income into widening the entrance to your bathroom in case you need to use a wheelchair at some point. You could also add a grab bar in your shower to help prevent falls.
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