Tax Time is Financial Planning Time

With tax refund checks now rolling in for Americans, many are deciding whether to splurge on luxurious items, such as an entertainment center or a vacation, or pay off that annoying credit card debt. While the short-term boost is welcome, tax time also provides a reminder to think about your long-term financial picture.

With tax refund checks now rolling in for Americans, many are deciding whether to splurge on luxurious items, such as an entertainment center or a vacation, or pay off that annoying credit card debt. While the short-term boost is welcome, tax time also provides a reminder that people should be thinking long and hard about their overall financial situation and assess your long term investments and savings.

How do you stack up?

The major component of this for many Americans is their employer-sponsored defined contribution plan—the 401(k) or pension. Do you know the current status of your account? Are you on track to meet your targeted retirement goal? How do you compare against those in your age bracket? Are you above or below the median?

Looking at the median 401(k) amount can give you a realistic perspective on where you stand. Currently, for Americans age 35-44, the median 401(k) account value is $42,700. For those closer to retirement, ages 55-64, that number climbs to $103,000. Those numbers track with the average deferral rate of 7%, found in Vanguard Group’s “How America Saves 2014” study.

If you’re currently behind those figures, you can still make up ground. The deferral limit set by the Internal Revenue Service for 2015 is $18,000 with $6,000 falling under the “catch up” clause for anyone over the age of 50.

Making Choices

The simplest option is asset-mixed funds like target-date funds, lifestyle funds, or balanced funds, which are automatically diversified and rebalanced. These are great for those who want to “set it and forget it.”

Those who want to build their own portfolio need to research details of individual stock funds, bond funds, money market funds and stable value funds.

Most people focus on picking the right stock fund with great companies to generate the best return on their investment. Right now, stocks are flying high and yielding very good returns. However, preserving your capital is just as important. As shown during the global financial crisis of 2008, there is risk involved in stocks, no matter how well they are doing. Stock investments must be balanced with more conservative options.

Hanging on to Your Cash

Two conservative options to consider are money market funds and stable value funds. Money market funds are more recognized than stable value funds, mainly due to stable value funds being only available through defined contribution plans while money market funds are offered by banks independent of any plan. While money market funds are more popular, though, they have not performed as well as stable value funds.

Traditionally, stable value funds exceed money market funds by up to 2%. That may not seem like much until you consider that money market funds are returning close to zero currently. In fact, in the fourth quarter of 2014 stable value fund returns were 2.04% while money market funds’ average return was just 0.10%.

Every person will have a different perspective on the investments that are right for them, but it’s critical that both the saving and growth sides of the equation are carefully considered.

While that new flat-screen TV may feel great, don’t lose sight of the bigger financial picture. If you understand the available options and adjust your investments accordingly, you’ll feel much better about spending that refund.

Gina Mitchell, CEBS, (pictured above) is President of the Stable Value Investment Association (SVIA), based in Washington DC. She is the voice for stable value funds and one of the leading authorities on retirement investing. Mitchell joined SVIA from Financial Executives International, where she was director of governmental affairs for the Committee on Investment of Employee Benefit Assets, the largest corporate pension group in the nation, and has worked on state and federal policy for the National Conference of State Legislatures, the National Governors Association as well as the Coalition of Northeastern Governors.

The Stable Value Investment Association (“SVIA”) is a non-profit organization dedicated to educating retirement plan sponsors and the public about the importance of saving for retirement and the contribution stable value can make toward a financially secure retirement. The SVIA is one of the leading authorities on retirement investing. Its membership represents all segments of the stable value investment community including public and private plan sponsors, insurance companies, banks, and investment managers and consultants, such as Prudential Financial, Invesco Advisers, MetLife and JPMorgan Asset Management.