Photo: Robert Trachtenberg
Q: I'm a 46-year-old single woman earning $34,000 a year. Sometimes I feel so anxious about having enough to retire on that it takes away from my enjoyment of life. I have $30,000 in mutual funds and IRAs (but no pension), and no debt apart from my mortgage, which will be paid off in about eight years. I've been unemployed twice due to layoffs, so I'd like to have access to my money. Assuming I can work for quite some time, roughly how much do I need to save? I live simply but don't want to end up eating cat food.
A: While I understand your concern, I have to say that you're doing an impressive job considering your relatively modest salary. Many women making twice as much as you are saddled with debt and a huge mortgage they'll be paying down well into retirement. Give yourself credit for being so good with your money.
The best news here is that you'll finish off your mortgage in your early 50s. That means you don't need to save nearly as much as someone who anticipates having to keep making mortgage payments after she stops working.
Once you pay off the house, I want you to keep making monthly payments—to yourself. Invest that same amount in a Roth IRA. If you follow a few simple rules, you'll be able to withdraw all the money in retirement without paying a penny of tax. When you reach the annual maximum contribution for the Roth, build up an emergency cash reserve. The more you put away, the better.
Because you've been so house smart, once you turn 62 you will be eligible for a reverse mortgage: If you find your own retirement savings aren't enough, a reverse mortgage allows a lender to pay you income (in a lump sum, a monthly advance, a line of credit, or a combination of all three) based on the value of your home. There's no risk of losing the property. I hope that hearing all this will help you enjoy your life more fully today.
Q: I am a 24-year-old mother of two, and I'm getting a divorce. My salary is about $50,000 a year, and I receive no child support. I plan to return to school and will probably make only about $20,000 once I cut back my work hours. I now put 6 percent of my income into my 401(k), adding a percentage point per year. Should I keep putting money into my 401(k), despite my limited income? Or should I wait until I finish school?
A: I wish I could bottle up your spirit and share it with the world. After reading your first three sentences, I was sure you would ask how you could make it as a single parent on one income that is dropping 60 percent. But instead you're focused on building security. That tenacity tells me you can do anything you set your mind to.
But you need to be realistic. On $20,000 a year, you will already be stretched thin. So please don't shortchange basic needs to keep saving for retirement while you are in school. Look at school as a big part of your financial plan: By upgrading your skills, you give a boost to your future earning power. When you're back working full-time, you can refocus on retirement investing.
But if you seriously think you can save for retirement and support your family while you're in school, here's my strategy: As long as you have a large emergency savings fund that can cover eight months of living expenses, keep investing in a 401(k) if you get a company match. Maybe it can't be 6 percent of your salary next year (that would be $1,200 of $20,000), but even at half that, you would benefit from the company match.
If you don't have an emergency savings fund, or your employer doesn't offer a matching contribution, skip the 401(k) while in school and invest in a Roth IRA . It has no tax or penalty if you dip into your contributions to cover an emergency. Only your Roth earnings would be hit with a tax, plus a 10 percent penalty for an early withdrawal. So your Roth could do double duty: When things go well, it serves as a retirement account; in times of trouble, you can pull out your Roth contributions without tax or penalty. Any money you invest in a Roth should go into low-risk investments, such as a money market fund, CDs, or short-term Treasury bills. Once you're out of school, you can move your investments to stock exchange-traded funds or mutual funds; over the long term, stocks will help you earn inflation-beating gains. Over the short term, they are too volatile to use for a quasi-emergency fund. Good luck!
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