Saver plans for nuptials, other events at age 25

October 21, 2007|By Kara McGuire | Kara McGuire,MINNEAPOLIS STAR TRIBUNE

Megan Wille has the bug. She began saving through her workplace 401(k) shortly after starting her job for a local advertising agency. She increased the amount withheld from her paycheck when she got a raise and now saves about 11 percent of her salary including the company match. Two years later and she has amassed nearly $6,000.

"How could I have so much money saved up and I never missed it?" the 25-year-old exclaimed.

She's thrilled her money is growing, but unsure that she selected the best funds: "My parents said, `Just pick a mix.' "

Media planners like Wille make $40,000 to $45,000 a year, and the St. Louis Park, Minn., resident lives within her means. She has no credit card debt, a $4,000 car loan at 6.75 percent, and about $19,000 in student loan debt, with much of it locked in at an enviable 2.625 percent.

Even with the occasional Target shopping spree, Wille generally finds herself staring at a $500 surplus at the end of the month. But she has no short-term savings strategy aside from not spending much.

"Large life events are around the corner and I don't feel like I'm prepared for them financially," said Wille, who hopes to buy a house by age 30 with her boyfriend. Also in her future: the possibility of wedding bells adorned with a price tag of at least $15,000, she figures.

Wille met with Joe Pitzl, a certified financial planner with GEN Financial in Plymouth, Minn., to take a peek at her retirement plan choices, create a near-term savings plan, and help her decide what to do with a $2,000 CD that's about to come due. Here's what he suggests:

Keep saving, but fix the mix. Wille chose four funds for her retirement plan, figuring that even if they weren't optimum, she could get help later. Currently, she owns a high-yield bond fund (a "risky" category of bonds), an aggressive stock fund, a stable-value fund (that's code for cash), and a target retirement date fund (a managed basket of stock and bond funds that change as you near retirement).

Her mix demonstrates that owning multiple funds doesn't mean proper diversification.

More than half of her money is in fixed-income investments like bonds and cash. Common advice is for young people to have no more than 20 percent in bonds and cash.

And, like many investors, Wille is incorrectly using the target date retirement fund. Those funds are designed to be a one-stop diversification tool.

"If that's your choice, it should be your [only] choice," said Pitzl.

But many investors worry that a portfolio can't be diversified without multiple fund picks.

His suggestion: Invest 20 percent in a diversified bond fund, 30 percent in a large-cap mutual fund or index, 20 percent in a small-cap fund, and 30 percent in an international stock fund. She should tweak the mix each year so the pieces of her investment pie don't get out of whack as some investments outperform others.

$50,000 threshold. Wille's instinct is to put her $2,000 CD toward her debt. But Pitzl disagrees. The bulk of her student loans are at rock-bottom fixed rates. And the interest is currently tax-deductible, "so the net interest rate you are paying is actually less than stated," Pitzl explained. This benefit is phased out once her modified adjusted gross income reaches $50,000. He tells her to re-evaluate whether to keep the debt or pay it off when she reaches that income level.

Roth IRA. Pitzl wants Wille to put about $250 per month and the $2,000 from her coming-due CD into a Roth IRA. Pitzl calls it "the ultimate investment vehicle," because any of the after-tax dollars she puts in can be taken out at any time without penalty. It also has special withdrawal rules for first-time homebuyers.

One of the big struggles for young adults is deciding "how much do we tuck away for retirement and how much do we keep" for weddings and other major life expenses, Pitzl said. The Roth's versatility takes some pressure off of that decision. She can open one online from a low-cost mutual fund provider such as Fidelity or Vanguard.

Kara McGuire writes for the Minneapolis Star Tribune.

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