3 Moves You Should (and Shouldn’t) Make With Your Tax Refund as You Near Retirement

If you’re used to receiving a tax refund each year, you might view it as a financial bonus that funds your entertainment expenses or luxuries such as travel. But, as you near retirement, that tax return could start playing a more serious role in your money strategy. Even though directing your tax refund toward more practical categories, such as debt repayment, isn’t as exciting, doing so could set you up for a smooth transition into retirement.

Looking for the most strategic places to apply your tax return as you plan for retirement? Here’s where you can start.

Invest your tax return

There are a number of ways you can invest your tax return, depending on your risk tolerance. Most basically, you can put it toward your retirement savings plan, whether that’s an IRA or a 401(k). If you don’t typically max out your retirement savings, this could be the ideal way to start contributing more, especially if you have an employer match. You could also use your return to boost your investment portfolio by purchasing stocks, bonds or mutual funds.

Investment do’s

Statistics show the average tax refund is $3,660, which can give your investments a significant boost or help you to get started. If you’re not familiar with investing, getting started can be intimidating. Here’s what to keep in mind:

  • Be realistic about your risk tolerance. Usually, investments with the highest returns also have the greatest risk. Remember, there’s no guarantee you’ll make money with your investments. In fact, you could lose it all. Make sure you’re OK with the amount you’re risking, or search for investments that have a lower risk.
  • Understand your ideal retirement lifestyle. Not everyone wants the same things in retirement. Your ideal lifestyle could involve working part-time, traveling, returning to school, living with your children — the possibilities are so varied. Each lifestyle will have different expenses. It’s important to understand how much you think your ideal lifestyle will cost, which can help determine how much you need to save and earn from your investments.
  • Hire a licensed professional. If you’re going to hire a professional to help with your investments, make sure they are licensed with the federal government or a state securities regulator. The federal government has a free search tool to help you find a registered professional in your area.

Investment don’ts

It’s easy to make investment mistakes at any time in your career, but these mistakes become more painful the closer you get to retirement because you have less time to earn money. Here’s what to avoid when you invest near retirement.

  • Don’t invest in your friend’s business just because it sounds good. Chances are you probably have friends or relatives who are starting businesses, and some of them might even convincingly claim they have a great investment opportunity for you. Try not to let the emotion of a “good opportunity” cloud your logic. Private investments can be risky, so do your due diligence before contributing any money to someone else’s dream.
  • Don’t forget to rebalance your portfolio. In order to make sure your portfolio is properly diversified and your risk level is appropriate, you should be rebalancing it quarterly. You could consider investing more heavily in secure investments, like bonds, as you near retirement and want to assume less risk.

Consolidate your debt

If you have a lot of debt heading into retirement, you’ll want to review strategies for repaying that quickly so you have fewer financial obligations once you stop working. With debt consolidation, you combine all of your outstanding loans into one new loan, simplifying your monthly bills. By refinancing at a lower interest rate at the same time, you could potentially reduce your payments and get out of debt sooner.

Consolidation do’s

Here’s what to remember when you’re consolidating:

  • Calculate your monthly payments in advance. Before obtaining a new loan, use a consolidation calculator to determine your estimated payments, time to be debt free and the lowest interest rate.
  • Build your credit score. Making timely payments on your new loan can help build your credit in case you need it for other uses in retirement.

Consolidation don’ts

Keep these in mind before your consolidate:

  • Pay off your old loans. Make sure you use the funds from your consolidation loan to pay off your existing debt. Check to make sure your credit report reflects the changes. Make sure you don’t accumulate more debt on your paid off credit cards after you consolidate.
  • Don’t forget to watch for hidden fees. Interest rates aren’t the only fees you need to compare when considering consolidation. Look for prepayment penalties on your existing loans and an origination fee on your new loan.

Home improvement

If you’re planning to downsize or move in retirement, using your tax refund to prepare your home for sale could be a savvy way to afford the costs of home renovation. Once you talk to a real estate agent to determine the most prudent repairs or updates, you can either save and invest your tax refund over several years to cover the eventual cost or do small repairs each year.

Renovation do’s

Here’s what to keep in mind before you start renovating:

  • Focus on repairs. If there are parts of your home in need of obvious repair, fixing these trouble areas before listing will likely help you fare better with prospective buyers. Depending on how long you plan to stay in the home after repairs, they could also help reduce your costs now. This could be the case for replacing your roof with a more energy-efficient version.
  • Get local knowledge. Since buyer priorities change in different markets, talking to a real estate agent who has local experience can help you narrow down the projects that are most likely to increase the value of your home.

Renovation don’ts

Getting excited about upgrading your house? Just make sure to avoid these common mistakes:

  • Don’t make trendy changes. Chances are a buyer will want to redecorate your home to better match their style, so don’t make changes that align with current decor trends. Use your funds to upgrade the tried-and-true basics.
  • Understand what adds value. Not all upgrades carry the same weight for prospective buyers. Statistics show upgrades to siding hold their value the best (recovering as much as 92.1% of the cost upon resale) while projects like a master suite addition only recover 47.7% of the initial investment.

Jolene Latimer has her master’s in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.

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