Saving for Retirement: How to Manage Expenses as You Save for Your Future

Are major expenses impacting your ability to save for retirement? These simple strategies could help you keep your savings plan on track.

by Scott Steinberg - January 13, 2020

When you’re faced with pressing financial demands, such as paying college debts or your mortgage, or covering other major expenses, postponing saving for retirement could seem like the right choice. After all, that means you could pay off those expenses more quickly. But putting off saving for retirement isn’t always best.

“The key is to be smarter about managing your money, not just earning it,” says Kevin Simpher, Financial Advisor and Associate Vice President – Investment Officer for Wells Fargo Advisors. “For example, it’s common for people with student loans to be so focused on paying down this debt that they forget they could be earning more income by putting their savings into investments.”

Below, Simpher shares three strategies that could help you keep saving for retirement while addressing other financial priorities.

Focus on investment earnings as a way to pay off debt

Simpher recommends comparing the average rates of return you’re getting on your investments to the interest rates of debts or loans. Which is higher? That can help determine if your priority should be to invest for the potential returns1 or pay off debt and knock out those interest charges. “If your monthly debts are manageable, you could be better served by investing the additional money, which has the potential to compound with each passing year,” he explains. “Then you could use its earnings to pay off the debts.”

For example, Simpher once worked with a 38-year-old client who used his annual bonus of around $20,000 to pay down his mortgage, which was a 15-year loan set at a 3.25% interest rate. But his client was expecting to see an average rate of return of 7.8% across his investment portfolio—more than enough to meet these monthly burdens and then some. In Simpher’s opinion, he would have been far better served by putting that bonus into an IRA or a 401(k) account and having the potential for that extra 4% after expenses add up and multiply over time.

Consider starting a 529 savings plan account

If your kids are planning to go to college, Simpher says you could also consider starting a 529 savings plan account. It lets you contribute up to $15,000 per child annually to pay for qualified educational expenses tax-free. (The plan could also be used to pay for up to $10,000 of tuition annually for kindergarten through grade 12.) Learn more about the use of 529 college savings plan accounts in “Changes to 529 Plans and Other Tax Reforms for Education Savings.”

Setting up a 529 college savings plan account provides another helpful way to help let your money compound for years, have the potential for ongoing investment growth, and keep investment expenses to a minimum, Simpher says.

Help cut costs with a priority credit line

If you’re worried about high-interest debt from credit cards, medical bills, or other expenses, Simpher suggests considering a Priority Credit Line (PCL). This securities-based lending option lets you borrow money at a competitive rate against the value of your investment account. A PCL offers a way to help cut expenses and gain immediate access to additional funds without having to put your retirement goals on pause.

These three strategies may help you successfully balance reducing your debt and saving for your retirement. Talk with your financial advisor about what plan may be right for your unique needs. That conversation should include how to have enough to cover expenses during your retirement years—especially as we live longer lives.

Scott Steinberg is an award-winning professional speaker and the author of "Make Change Work for You: 10 Ways to Future-Proof Yourself, Fearlessly Innovate, and Succeed Despite Uncertainty."

Additional Resources

Here are nine tips to help Baby Boomers save for a longer, more expensive retirement.

1All investing involves risk, including the possible loss of principal.

Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.

Securities-based lending has special risks and is not suitable for everyone. If the market value of a client’s pledged securities declines below required levels, the client may be required to pay down his or her line of credit or pledge additional eligible securities in order to maintain it, or the lender may require the sale of some or all of the client’s pledged securities. Wells Fargo Advisors will attempt to notify clients of maintenance calls but is not required to do so. Clients are not entitled to choose which securities in their accounts are sold. The sale of their pledged securities may cause clients to suffer adverse tax consequences. Clients should discuss the tax implications of pledging securities as collateral with their tax advisors. An increase in interest rates will affect the overall cost of borrowing. Wells Fargo Advisors and its affiliates are not tax or legal advisors. All securities and accounts are subject to eligibility requirements. Clients should read all lines of credit documents carefully. The proceeds from securities-based lines of credit may not be used to purchase additional securities, pay down margin, or for insurance products offered by Wells Fargo affiliates. Securities held in a retirement account cannot be used as collateral to obtain a loan. Securities purchased in the pledge account must meet collateral eligibility requirements.

Wells Fargo Advisors (“WFA”) and its Financial Advisors have a financial incentive to recommend the use of securities-based lending products (“SBLs”) rather than the sale of securities to meet client liquidity needs. Financial Advisors will receive compensation on Priority Credit Line (“PCL”) and other non-purpose SBL from Wells Fargo Bank. Your Financial Advisor’s compensation is based on the outstanding debit balance in your account. In addition, your Financial Advisor’s compensation will be reduced if your interest rate is discounted below a certain level. This creates an incentive for Financial Advisors to recommend PCL and other SBL products, as well as an incentive to encourage you to maintain a larger debit balance and to discourage interest rate discounts below a certain level. The interest you pay for the loan is separate from, and in addition to, other fees you may pay related to the investments used to secure the loan; such as ongoing investment advisory fees (wrap fees) and fees for investments such as mutual funds and ETFs, for which WFA and/or our affiliates receive administrative or management fees or other compensation. Specifically, WFA benefits if you draw down on your loan to meet liquidity needs rather than sell securities or other investments, which would reduce our compensation. When assets are liquidated pursuant to a house call or demands for repayment, WFA and your Financial Advisor also will benefit if assets that do not have ongoing fees (such as securities in brokerage accounts) are liquidated prior to or instead of assets that provide additional fees or revenues to us (such as assets in an investment advisory account). Further different types of securities have higher release rates than others, which can create a financial incentive for your Financial Advisor to recommend products, or manage the account, in order to maximize the amount of the loan.

Priority Credit Line is offered by Wells Fargo Advisors and lending and margin accounts are carried by Wells Fargo Clearing Services, LLC