Saving for Your Future – Just do it!
Tuesday, April 24 2012
We asked Mary Ellen Garrett of Merrill Lynch what investment advice she would offer women in these real-life scenarios. She talks 401(k), Roth IRAs, home refinancing and the importance of starting NOW. See if any of these profiles offer answers to your own investment questions.
“I am just a few years out of school – thank you college loans - in my first entry-level job (lots of experience, not a lot of salary) and saving seems almost impossible. How do I get started?”
Mary Ellen Garrett: I would congratulate that young woman first by knowing the importance of starting early. If she is starting at a job that offers a retirement plan – retirement must seem a long time off – that is really one of the best ways to get started because of the advantages that the company gives you. It may be a large company which has a 401(k) or it may be a smaller company that offers a 401(k) for them to just be able to make a contribution. A larger company might give them the benefit of matching their contributions, and they should always take advantage of that because if they don’t, it’s like leaving free money on the table.
When you’re investing in a company-sponsored retirement plan, you get the advantage of making pre-tax contributions, so that’s a tax savings. If you’re lucky enough to be with a company that matches then you get that match, which is also an additional tax savings and the assets grow tax deferred. So, you’re getting really three times the tax savings that you would in anything else. And if they take it out of your check automatically, you won’t miss it.
People that are sponsoring the 401(k)s for the company usually offer training sessions, and you should try to attend those sessions so you can ask questions about how you money should be invested and how you can save along the way.
“What if I’m not working for a company that offers any kind of 401(k)?”
Garrett: You might find that you just live on every penny that you make and the majority of people do, especially if you are right out of college and especially if you have college loans to pay off. It’s very difficult, but it’s important to get in the habit early of paying yourself first -- and pay yourself first via savings. If you can start even with 5 percent (of your income) – 10 percent would be ideal -- but even with 5 percent to put toward a retirement plan, and that could be done through a Roth IRA.
A Roth has some different tax advantages. You can’t put as much in it as a 401(k), but all of those assets grow tax-free, not tax-deferred – and there is a difference. Tax deferred means you are going to pay your taxes later. Tax-free means you’ll never be taxed on those monies or the growth of those monies. So, if you can even afford to put a little bit of money into a Roth every year that would be a great way to save.
I would always save tax-free or tax-deferred first before I would save on an after-tax basis. In addition to that, I would also concentrate on paying down any of your debt. If you could carve out a percentage of your take-home pay to pay down debt and to put a little aside every time, you’ll see that debt paid off sooner, and you’ll see that growth come sooner, too.
“I’ve just had my second child and my 34th birthday. With two kids, car and house payments, day care costs, college funds and potential private schools, how much is reasonable for me to invest at this point? Is this a way for me to grow my children’s college funds? Should I be more concerned with retirement, college funds, trust funds or just getting through the day?
Garrett: Well, I relate to that person. I did that. Two kids, cars, house payment, day care, college, private school - it’s all there. It’s amazing how you just handle it. The bottom line is and the good new is you are usually so busy that you’re not spending a lot of money on anything frivolous. You’re spending it all on the kids.
But the answer to the question, how much is reasonable for me to invest – it will be relative to your situation – but the real answer to that is as much as you possibly can. You want to really look at your debt scenario and make sure you are managing your debt properly. That means that if you do have a house payment, make sure that you have as low interest rate as possible because it is the lowest we’ve seen in decades, and we will probably never see this kind of good scenario ever again in our lifetime.
Make sure you are managing your debts just as you are managing your assets. It’s just as important if not more important to do that. As far as priorities, it’s going to be debt management first, tax-deferred or tax-free saving second, and then, where the kids are involved - look into beginning a 529 plan. The 529 offers the ability to save for your children’s college, and those funds grow tax-free.
“I am a single woman in my mid-40s and from where I sit today – behind my desk at 7:15 a.m. - I am not anticipating that I will be part of a two-income household. How do I best prepare for retirement on my own?”
This sounds like the women that I work with, and they are probably the most educated because they seek advise. Often they have gone through something as traumatic as a divorce or possibly a death of a spouse, and once they come up for air from either of those two scenarios, I find that they ask more questions. They want to know how things work, and as a result they are more conscientious of the decisions that they make because they recognize that they probably will be a one-person household.
It’s going to be best for this woman to partner with someone to help them make these decisions. They have all of the issues of the woman we just discussed, but they have a little bit more time, a little bit more experience and probably even have a little bit more money. If they are a widow, they might be the beneficiaries of a life insurance policy, so that could be a help to them in finishing raising their children.
But if they are faced with this scenario on their own, I really can’t advise strongly enough to partner with an advisor and take their time finding the right one, someone they can communicate with, that they really click with and somebody they can confide.
“I’m 52 and wondering if I will ever retire. I’ve made a lot of unorthodox choices – going back to school at 41 and starting a new business at 47 – and can I expect to grow a business and save for retirement?”
Garrett: The answer to all of the above is yes, and I would tell you that everyone has made unorthodox choices over the years. There isn’t any scenario that just fits A to Z when it comes to investing. They are all different. And if you are starting a business - good for you. You are a CEO, and one of the first things to do is put in a corporate retirement plan. You can put in anything from a 401(k) for a larger company to a SEP for just even a few members because that would be a great way for you to save and for you to attract employees.
Being 52 today is different than it was 10 years ago because we’ve been through 2008 and 2009 where the markets just tanked. People who are 52 today aren’t even thinking about retiring. I’m 52, and I have no intention of retiring anytime. My choice is about desire - I love what I do.
But you are in the last third of your income working years, maybe you are in the last quarter and you don’t want to make mistakes. One of the biggest mistakes is to get out of the market altogether because you’ve seen what has happened. That’s why you need to seek advice about how to properly invest at this stage of your life in order to provide for your future when your assets have to become your income source.
“I have two children in college and the expenses are more than we ever expected. My husband and I are wondering if we should tap into our retirement to get our kids through school. Yes, there’s guilt and wanting to do right by our kids so any advice you can offer…”
Garrett: You want to be able to offer your children the best, but are you doing it at the expense of your own retirement when you can’t replace that growth and your portfolio? I am not a proponent of that. I think your retirement planning is for you; it’s for you and your spouse to live comfortably. You are giving up potential tax deferral, potential growth and the potential to retire when you want to.
I think I would look for other ways either in lieu of or in addition to, so you don’t take on too much debt for the sake of your children and give up all these benefits that you’ve been working so hard for. Meet with the college counselors for info on loans that are offered at fairly low interest rates and scholarships you can apply for, and get the kids involved so they have a little skin in the game. This isn’t all about you doing everything for them. This is about helping them become independent and looking for ways to do that – so partner with your children.
Here is more financial advice:
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