Seek­ing a Work Niche and Tak­ing the Long View

The Washington Post Sunday - - Personal Finance -

Meghan Nelson, 23, is a free spirit, but at the same time, she wor­ries about hav­ing enough to live on in re­tire­ment. Her grand­fa­ther is 100, and that makes her aware of the need to save.

“I re­al­ized that if I were to re­tire at 65, I’d still need enough to sus­tain me for po­ten­tially 35 more years,” she said.

Nelson has de­grees in com­mu­ni­ca­tions and pub­lic re­la­tions from Pa­cific Union Col­lege in Cal­i­for­nia and hopes to find a job in which she can use her cre­ativ­ity. Now she’s do­ing tem­po­rary work, mak­ing about $200 a week. While she’s de­cid­ing on her next move, she plans to re­turn to mak­ing wed­ding videos for in­come.

In the mean­time, she’s read­ing, study­ing mu­sic and tak­ing cour­ses in Ara­bic at the USDA Grad­u­ate School and the Is­lamic Cen­ter — her ges­ture to­ward cre­at­ing un­der­stand­ing be­tween the West and the Is­lamic world. Last year she trav­eled ex­ten­sively, but this year, be­cause of con­cerns about air­craft emis­sions and be­cause she doesn’t want to draw down her re­tire­ment ac­counts, she’s de­cided to limit her travel.

She has health in­sur­ance for which she pays $78 a month through her temp agency. She lives with her dad in Bowie, which helps cut ex­penses. Nelson has nei­ther stu­dent nor credit card debt and spends rel­a­tively lit­tle, though she says she has a weak­ness for choco­late.

“I cut my own hair. I rarely shop for clothes,” she said. “I some­times sew my own clothes or al­ter my re- pos­i­tory of sec­ond-hand pieces.”

Nelson has been con­tribut­ing to a Roth IRA for two years, putting in the full $4,000 al­lowed each year. Her re­tire­ment funds are in­vested in a U.S.-China growth mu­tual fund and a Van­guard medium-cap in­dex fund. She also has about $3,000 in an in­ter­est­bear­ing on­line check­ing ac­count.

She wants to know how much she should be sav­ing to­ward re­tire­ment as she tries to de­fine more im­me­di­ate goals. “It’s the start of a new pe­riod, so I’m ex­cited by the pos­si­bil­i­ties,” she said.

Build an Emer­gency Fund and Con­trib­ute

To a Work Sav­ings Ac­count

Re­search econ­o­mist An­thony Webb saw a lot to like about Nelson’s sit­u­a­tion. “She doesn’t have any stu­dent loans, has avoided tak­ing on credit card debt, has health in­sur­ance and is man­ag­ing to live within her means, even though she doesn’t have a full-time job.”

And he had a mes­sage for her — that it’s okay to eat choco­late some­times and also oc­ca­sion­ally okay to not be sav­ing for re­tire­ment, as long as you don’t make a habit of it.

He noted the dif­fer­ence be­tween a tra­di­tional IRA on which taxes are de­ferred un­til you draw the money and a Roth IRA, in which funds are taxed go­ing in but not com­ing out. “Right now, Meghan’s in­come is prob­a­bly too low for her to get much ben­e­fit from the tax de­duc­tion on a tra­di­tional IRA,” he said. “So she has made a smart move by choos­ing a Roth.”

Fi­nan­cial plan­ner Sue Stevens said Nelson should look for a job that has a 401(k) or 403(b) plan and try to con­trib­ute at least $300 a month once she takes a per­ma­nent job. By the time she is 40 — if not sooner — she should be con­tribut­ing the max­i­mum al­lowed, Stevens said.

Webb and Stevens both thought that the $3,000 in Nelson’s check­ing ac­count is not enough to serve as an emer­gency fund. Stevens sug­gested that she bump it up to about $5,500, or enough to cover about three months of ex­penses.

Webb noted that in­vest­ment al­lo­ca­tion “is all about try­ing to get the best pos­si­ble trade-off be­tween risk and re­turn.” He con­tin­ued, “One way of do­ing this is by di­ver­si­fi­ca­tion, and I am con­cerned that she has put a lot of her eggs in a China bas­ket.” In­ter­na­tional ex­po­sure is fine, but she might be bet­ter off with a broad-based in­ter­na­tional fund, he said.

And he had one fi­nal word of ad­vice based on her con­cerns about air­craft emis­sions. She might want to think about funds that in­vest with en­vi­ron­men­tal con­sid­er­a­tions in mind. Webb said there is no ev­i­dence that “eth­i­cal” funds do worse than reg­u­lar funds. “This is one sit­u­a­tion where do­ing the right thing won’t cost her any­thing,” he said.

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