Sights Set on a House And Early Re­tire­ment, Too

The Washington Post Sunday - - Personal Finance -

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.

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