Have you dared look over the edge of your own "fiscal cliff," or has the fear of falling kept you from contemplating the possibility of another recession, job losses, tax increases and likely cuts in your Social Security and Medicare at some distant date?
No need to fear. Rather, walk to the edge, look down and then picture your own safety net ready to stop the fall. Install one now to save yourself from the ongoing risks you and your family undoubtedly will keep facing during the next few years.
The recent federal debate about tax increases and government spending cuts has just begun. Regardless of what happens in the near term, the nation will be trying to whittle away at its gigantic debt for years. That means your taxes are likely to rise at some point, and when you arrive at retirement you will need more of your own savings to survive, because the government will pull back.
Here's how to erect your safety net now, before tax increases kick in months or years down the road:
Keep an emergency stash.
Does your employer depend on the government as a customer, or will your employer face pressure to attract customers if taxes increase and people cut back on spending? That could lead to new layoffs, so have at least six months of savings in case you lose your job.
Rummaging for cash.
Americans have been living more frugally the past few years, but even the most frugal can find savings if they go through credit card bills and checking accounts and list items they've been buying that they don't truly need or want. Many waste money on duplicative Internet and phone services, have more cable access than they truly need or may have life insurance that can be whittled back after children leave the home.
With home values rising somewhat, it may be possible to refinance your home and get monthly payments down. Try Zillow's mortgage/refinance calculator at bit.ly/RjmHcy
Cozy up to a budget.
Many people consider budgeting a pain, but those who live within a 50-30-20 budget eventually have peace of mind because they no longer feel out of control when bills arrive. For necessities, spend only 50 percent of the pay you have left after paying taxes. Necessities are mortgage/rent, insurance, food, utilities and so on. Thirty percent goes to wants, like vacations and gifts, and 20 percent goes into savings. In other words, savings are not what's left over.
Saving for retirement.
Saving for retirement has always been essential, but it is likely to become even more crucial as government deals with the nation's debt by making some cuts in Social Security and Medicare. Young workers who don't want to be stuck in a La-Z-Boy without cable at 70 are going to have to take saving more seriously than previous generations. See how you are doing with the ballpark estimate at choosetosave.org
Where to save.
Do your retirement savings at work if you have a 401(k) 403(b) or other workplace plan, especially if your employer will give you free matching money if you do. Otherwise, Roth individual retirement accounts are more appealing in an era of rising taxes. Anything you save in the Roth is supposed to be yours to keep - free of taxes for life as long as you don't touch it until you are 59 1/2 years old.
Historically, investing about 60 percent in stocks and 40 percent in bonds while saving for retirement has provided about an 8 percent gain on average annually, but not every year. Between 2008 and 2009, balanced funds lost 29 percent; $10,000 turned into about $7,700, and then climbed to about $13,000 three years later. In a 401(k), consider a target date fund with your retirement date in it. Some balanced funds for a Roth could be Vanguard Wellington, Vanguard Wellesley or Mairs & Powers Balanced fund.
Don't retire too early.
Before retiring, make sure your savings will stretch far enough. Calculators like bit.ly/VjugBZ will help. You can only use 4 percent of your savings in the first year of retirement, and boost it slightly for inflation each year, if you want to make sure the money lasts 25 years or more. Increase Social Security 8 percent a year for each year you wait to retire after 62.
Contact Gail MarksJarvis at firstname.lastname@example.org