Sights Set on a House And Early Retirement, Too
Negest J. Hayes, 29, is a health-care consultant for a government contractor. She would like to be able to retire at 55, but she also wants to buy a house. Can she do both?
Originally from the District, she worked her way through graduate school and received her master’s degree in public administration in 2005 from Bowie State University.
Hayes earns about $80,000 a year and is putting about 10 percent of her salary into a 401(k) plan, as she has done in previous jobs. She has about $25,000 in retirement savings and another $8,000 in regular savings she hopes to put toward a house. In the meantime, she is living with her parents in Upper Marlboro, which helps her save.
“My biggest challenge is trying to find a home that’s affordable and not have to sacrifice putting money away for retirement,” she said. “I’m not looking for granite countertops.”
Her retirement savings are in a U.S. stock index fund and a European stock index fund. Her contributions are not automatically matched by her employer, though the employer may elect to put money into the fund from time to time. She has employer-provided health care, though she pays a portion of the cost.
Hayes has been through that familiar rite of passage for young adults — piling up credit card debt. But she’s paid it off. Buying on credit was enticing, she said, but now she’s avoiding that trap.
“I just try to live very low on the hog,” Hayes said. “I try to pretend that I don’t make what I’m making.”
Her only remaining debt consists of about $14,000 in undergraduate loans at about 7 percent interest, which she can no longer write off on her taxes because of her income.
Hayes wants to know how she should invest her retirement savings; how to budget so she can save for a home without shortchanging her retirement; and how much she needs to set aside for retirement and future health-care costs.
With Many Pressures on a Salary,
Rethink Some Savings Goals
“Negest faces a dilemma that is probably familiar to many readers in their 20s and 30s,” said research economist Anthony Webb — too many competing demands on her salary as she tries to save for a house and for retirement while paying her student loans and trying to avoid deep credit card debt.
“Even with a generous salary, it is difficult to make the sums add up,” Webb said.
Webb and financial planner Sue Stevens applauded her for repaying her credit card debt but differed when it came to paying off her student loans. For Webb, that decision “is less clear-cut.” By investing in the stock market, she may earn more than the 7 percent interest she owes her lender, he said. Stevens, however, recommended that Hayes put $2,000 a month toward the student loans, which would repay them in a year. She also said Hayes should designate the $8,000 set aside for a house as an emergency fund.
Webb said he liked her overall investment approach. “Index funds typically have lower management charges than actively managed funds, and most actively managed funds fail to match the performance of their benchmark index,” he said. “Having some international exposure provides useful diversification and can lower overall risk.”
When it comes to budgeting, Stevens started out by figuring that Hayes’s after-tax income is probably about $4,580 a month. “She should try to live on $2,500 a month and use the other $2,000 a month to achieve her goals.” Stevens noted that the median price of a condominium in D.C. is $280,000, compared with $421,000 for a house. “It makes sense for Negest to save up for a condo at first,” she said.
To reach her goal of being able to retire at 55, Stevens recommended that Hayes increase her 401(k) contributions to $1,000 a month at age 30 and to the maximum allowed by 35. If she earns 8 percent over the next 25 years, she would have $1.3 million by age 55.
Webb agreed that Hayes would have to increase her savings rate to retire early. Even so, she might fall short. For that reason, she might want to rethink the early-retirement goal, he said. “Retiring early dramatically reduces retirement income because you not only reduce the period over which you save but also correspondingly increase the number of years your accumulated savings have to last,” he said.