What the experts say
Don’t cheer a big tax refund
“A generous income tax refund from Uncle Sam may feel like free money, but don’t be fooled—it isn’t,” said Darla Mercado in CNBC.com. The average refund for 2015 was $2,860, a chunk of cash that could help you pay down debt or save for retirement. But a massive check also means you’ve massively overpaid, depleting your cash flow to give the IRS what amounts to an interest-free loan. If you overpaid, ask your employer for a new W-4 form so you can adjust the amount withheld from each paycheck. You’ll need to change the number of personal allowances you claim—“the more you have, the less tax will be withheld.” To figure out the right number of allowances, use the withholding calculator available at IRS.gov.
The ideal retirement savings rate
There’s no correct percentage of your salary that you should be saving for retirement, said Walter Updegrave in CNN.com. The standard advice to put aside 15 percent a year is a “reasonable target,” but a lot depends on how early, or late, you start saving. A 25-year-old who earns $40,000 a year, gets 2 percent annual raises, and puts aside 15 percent of his or her pay year in, year out should be able to save 1.2 million by age 65, assuming a 6 percent annual return. But if “you put off saving until age 30, you would need to sock away nearly 20 percent of your salary to end up with the same size nest egg.” The best advice is to check your savings progress regularly using an online retirement income calculator, “and then make any adjustments necessary to stay on track.”
Avoid overborrowing for college
“Smarter borrowing during your college years could cut your student loan payment after graduation by more than $1,200 a year,” said Kelli Grant in CNBC.com. About half of undergraduate borrowers take out more in student loans than they need, according to a recent survey by NerdWallet, with the average graduate borrowing $11,597 too much. After factoring in interest, the result is an extra $119 in loan payments each month over a 10-year repayment period. Of course, the overborrowing is often intentional, with the money going toward lifestyle expenses like monthly bills and clothing. “So how much is too much to borrow?” One rule of thumb is that your total debt at graduation should be less than your expected starting salary. “Any more than that, and you’re likely to struggle with repayment.” ■