Five Financial Moves to Make Before 2010

Dec. 22, 2009 — -- Forget the resolutions, it's time to act.

As 2009 winds down, I say act now to improve your financial life. Don't just resolve to do something about it next year.

That's why I'm suggesting five moves you can make before the end of the year to brighten your financial outlook in 2010.

None of these suggestions is particularly unique, but they can be easily accomplished between now and New Year's Eve no matter how tight your finances. These are the can't-miss suggestions I'd give if given just 30 seconds to answer.

Implement just one and you will take a small step toward greater financial security. Implement two or more and you will accomplish more than many Americans do in a year.

Here are my five suggestions to end 2009 on a strong financial note:

1. Add one percent to 401(k) contribution: Think you can't save more for retirement? Then this is the way to go. Boost your current contribution rate by one percentage point now. Then do it again this time next year, and then again the year after that.

Within five years, you'll be saving an extra $2,500 a year on a $50,000 salary. That extra $2,500 a year, compounded at 7 percent a year over 30 years, can turn in to an extra $236,000 at retirement.

Maintain the momentum, and someday you may hit the maximum annual contribution. Currently, that contribution limit is $16,500 (plus another $5,500 for those 50 and over). Now that's a resolution to make for the long term.

2. Review life and disability insurance: This move won't lead to a bigger investment portfolio or cut your credit card debt. But it's an essential step for just about everyone.

If you are a parent raising children at home, then life insurance is essential. If you don't have it, then get it. In most cases, term life insurance is cheap relative to the protection it offers. For a 35-year-old man in good health, a $500,000, 15-year term life policy can be found for about $20 a month. (The price goes up for those in less-than-ideal health.)

Even if you have life insurance coverage through a job, you should consider a private life insurance policy. Most group life insurance policies offered by employers do not provide sufficient coverage, often just one or two times your annual salary. Also, you want a private policy in place in case you leave your job, whether by choice or by layoff.

Disability coverage is equally important, but receives much less attention than life insurance. If you're a young worker, there is a higher chance of becoming permanently disabled and unable to work than there is of dying prematurely.

Typical long-term disability policies offered through employers pay up to 60 percent of your pre-disability salary. Social Security provides additional coverage, but that by itself is not enough and the standards for being considered disabled are tougher to meet.

One thing to look for in a disability insurance policy: Will it pay if you are unable to perform your current occupation or any occupation? In most cases, you'll want what's called "own-occupation" coverage that covers your current type of work.

Finally, if you think your job could be at risk, look over your group life and disability policies to see if you can convert these to individual policies that you can take with you after you leave the job.

Debt and Taxes

3. Make an extra principal payment: There are two basic routes to building wealth. One is to save more than you spend. The other is to pay down debt. Either one will increase your net worth.

That is why paying down debt aggressively makes sense. Each extra dollar you dedicate to debt repayment generates a guaranteed rate of return equivalent to the interest rate of the loan or credit line you're paying down.

Most often you hear about extra principal payments when it comes to home mortgages. And that's a fine idea. But if coming up with an extra $1,000 in the days after Christmas is too much for you, then try the same strategy in a smaller amount with your car loan, student loan or credit card. Either way, you'll come out ahead.

For example, suppose you carry $10,000 in credit card debt at a 16-percent rate with a $250 monthly minimum payment. Add $20 a month to that amount and you will pay off the balance six months sooner and save nearly $500 in interest costs.

4. Set up a Roth IRA: Regardless of political persuasion, many financial advisers believe that income taxes in this country are at a low point and are bound to increase as a result of the nation's federal budget deficit.

One of the best defenses against higher taxes in the future is the Roth IRA. With a Roth, you contribute after-tax dollars to an investment account that is shielded from further taxation while the funds remain in the account.

Then, if the right conditions are met, the money can be withdrawn tax-free in retirement. These conditions require that the Roth IRA account have been open for at least five years and that the owner be at least 59 1/2 at the time of withdrawal.

If tax-free withdrawals sound attractive now, imagine how attractive they'll be when income tax rates are higher.

The advantage of tax-free withdrawals is particularly powerful for young workers who enjoy investing's most powerful tool: time.

Just be aware there are income limits on contributing to a Roth IRA, but those can be sidestepped with the lifting of an income cap on Roth conversions.

In the months ahead, you'll be hearing about the advantages of converting a traditional IRA to a Roth IRA. I'd be happy if most individuals would simply open a Roth.

To set up your Roth IRA, simply call one of the major online brokers or a mutual fund family that manage low-cost funds. These include Vanguard, Fidelity, Schwab, T. Rowe Price and TIAA-CREF.

Getting Ready to Move On

5. Prepare a resume: This sounds more like career advice than financial advice. But this suggestion addresses the recent trend of major employers cutting back or eliminating their contributions to employees' 401(k) accounts.

The companies cited financial pressures resulting from the economic tsunami that struck in 2008 and continued into this year. Many said they would restore their contributions when business improved.

I say hold them to their word. Don't settle for a job that contributes nothing to an employee's retirement either in the form of a 401(k) or a traditional pension plan.

Some companies will say it's too early in the economic recovery to restore 401(k) contributions. But my suggestion is to prepare now by updating your resume and being ready to look for new work when the job market improves.

A company that contributes nothing to your retirement does not deserve your loyalty.

Now, get going. It's time to act before 2009 comes to an end.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.