As you get ready to prepare your taxes, you might be thinking about saving for a rainy day or retirement. A financial expert has some advice on how to fortify your nest egg this year.
Greg McBride is the chief financial analyst at Bankrate, a financial services company. He said that last year, the broad market averages fell 19%, with most of that happening in the first half of the year.
“It’s when prices fall, when there’s short-term uncertainty, that you tend to get better values in the stock markets, a much better value now than it was this time a year ago, even with all of the uncertainty that lies ahead,” McBride said.
There’s evidence that high inflation is finally easing after the Federal Reserve’s sharp interest rate hikes, a federal policymaker told The Associated Press, but further rate hikes are still necessary to “decisively crush the worst inflation bout in four decades.”
From a long-term perspective, McBride said this is the time to continue making regular investments and payroll deductions to your 401(k).
“When you look back five or 10 years from now, you’ll be really glad that you kept investing through thick and thin in 2022 and 2023,” McBride said. “At some point, the market is going to turn around and begin to rebound, and that often happens even when the headlines are still pretty ugly. So you got to be on the train, not on the platform, at the point where it pulls out of the station.”
What is an I bond and why is it attractive during inflation?
I bonds are inflation indexed savings bonds. They are a type of U.S. savings bond “designed to protect the value of your cash from inflation,” according to Forbes.
McBride said I bonds garnered a lot of attention last year because of headlines proclaiming the rate of inflation at a 40-year high.
“The reason you buy this is to protect your future buying power,” McBride said.
As inflation comes down, the rate that the I bonds pay will also comes down; but McBride said they actually became a better investment because there are two components to the return on an I bond — “one is variable and it changes with the rate of inflation; the other is fixed, and it stays with you for the life of the bond.”
“Even though inflation has come down and the headline rate came down, that fixed return component is actually up. It’s up to 0.4%. What that means is over the life of the bond, you’re going to outperform inflation by 0.4% per year. So it makes it a pretty attractive option. Certainly as a way to protect your buying power without taking market risk,” McBride said.
You do have to hold the bond for at least a year and if you cash it within five years, you do forfeit three months worth of interest, he said. “You’re limited to $10,000 in purchases per year. But with a new calendar year, that door is now open.”
Certificate of deposit (CD)
With a certificate of deposit, or CD, you can lock in a return that you keep, even as inflation falls over the next few years.
A CD is a type of savings account with a fixed time period and interest rate, according to NerdWallet. These tend to have higher rates than a traditional savings account, and your access to your money might be limited until a term ends.
McBride said CDs are a win for savers on two fronts.
“Not only do you get a better return on CDs now than you’ve seen in many years, but that return also looks a lot better as inflation declines. So if you’re looking at say a three- or four-year CD, and you’re locking in at 4.5%, if inflation falls over the course of the next three or four years back to 2%, all of a sudden your 4.5% CD looks a whole lot better as time goes on,” McBride said.
Have an overall diversified portfolio
McBride said when it comes to your money, it’s not a “pin the tail on the donkey where you’re trying to find that one single investment that’s going to take you down the pathway to financial security.”
It’s important to have money for short-term needs, such as emergencies and unplanned expenses, as well as investments for the long haul, such as your children’s education or your own retirement.
This year, 401(k) limits have increased, and if you maxed out on contributions last year and you’re in a position to put away even more this year, that may mean toggling the percentage of your pay that you’re putting away every pay period in order to hit your max by the year’s end, McBride said.
But what if you’re not in a position to do that, as many people are?
Did you get a pay raise or maybe you got a lower price on your car insurance? Is there a meaningful reduction in your monthly expenses that gives you a little more money that you can shift into retirement?
“So, good time to be thinking about the long term, making those adjustments as we start the year,” McBride said.
There’s also some benefits if you’re 50 years old and up called “catch-up contributions.” These tax-advantaged additional money for retirement are designed for “the saver who may have gotten a late start on their retirement savings or was forced to delay their savings for some reason,” Bankrate said.
“As long as you turn 50 this year, you’re eligible to take advantage of those catch-up contributions,” McBride said. “So the annual contribution limit is $22,500 for a 401(k). But the catch-up contribution is another $7,500. So if you’re turning 50, or you’re already 50 or older, you have the ability to make that larger $30,000 total contribution this year.”
Some things to focus during your financial housekeeping
First, pay down high-cost credit card debt.
Credit card debt is already at a record high and it’s continuing to rise, McBride said. If you have good credit, grab a 0% or a low-rate balance transfer offer that can really turbocharge your debt repayment efforts.
Second, boost your emergency savings.
“Nothing’s going to help you sleep better at night than knowing you got some money tucked away for a rainy day,” McBride said.
Boosting your savings is a particularly prudent move right now with all the economic uncertainty, McBride said, adding that you’re getting paid more to have that money in savings.
“Online savings accounts right now are paying north of 4% and they’re still on the rise. Those are federally insured savings accounts that you can get to at any point,” McBride said. “You just got to keep on keeping on; continue to make those retirement contributions. When you look back long term, you’ll be glad that you stuck with it.”
