The saving secret for women? Start young
Women need to tuck away more money than men because they cycle in and out of the workplace more often, and they live longer. So it's even more important that they start early.
By MP Dunleavey
Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the continuing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.
I learned a couple of things as I was helping three young members of the Women in Red -- Lyndsey, Stephanie and Jill -- figure out their retirement plans.
First, I realized that my own retirement plan would be in a lot better shape if I'd started saving in my late 20s or even early 30s. And second, that although it pays to get an early start, there are still some traps to avoid.
All of which makes it essential that these three save as much for retirement as they can -- ratcheting up to 15% of their gross income, Dee recommends -- while also funding both short- and long-term savings to ease the temptation to raid the piggybank.
Lyndsey: The reluctant saver
In terms of savings, Lyndsey, at 27, has come a long way but still has a long way to go.
Although she doubled her 401(k) contribution from 2% to 4%, would it kill her to throw in the last 2% to get the full match her company offers?
You might think so, the way she's been dragging her heels. Sharon Rich, a financial planner and founder of Womoney, a financial-education Web site for women, thinks Lyndsey's investment portfolio could use some tweaking, but that her main hurdle is saving more.
Lyndsey's finances CurrentTarget
* Based on 4% annual drawdown and not including Social Security.
Lyndsey is on track to have saved about $575,000 by the time she's 70, which would give her an income stream of about $23,000 a year in today's dollars, not including Social Security, if she lives to age 100.
If she ramps up her savings to 15% in the coming year or two, and her income rises by 10% (another benefit of being young is that your paycheck is likely to grow), Lyndsey could save about $1.1 million, which would yield a more ample $44,000 annually.
"She really needs to get that full match -- it's free money," Rich points out. "And she needs to think about contributing 15%. Otherwise she's going to cause herself to have to work a lot longer and with a restricted quality of life."
The debt issue
Rich was as concerned about Lyndsey's $11,000 in credit card debt as she was about her snail's-pace savings. "She needs to peel off money to pay for debt on a regular basis, before it even gets into her hands -- the same way she saves for retirement," says Rich.
I told Rich that Lyndsey is well aware that her spending habits have gotten her into this hole, but she keeps using her credit cards anyway. Rich, sounding stern, then said that Lyndsey might need to use the dreaded Envelope System. Here's how it works:
"If the money is there, she can spend it," says Rich. "When it's gone, it's gone. It's called the no-brainer approach."
Once the debt is paid off, Rich wouldn't use that cash to supplement the 401(k). She'd have Lyndsey start a serious savings account for the expenses she will soon want to cover: a down payment on a home, a car, etc.
By and large, Rich thought Lyndsey's portfolio was in good shape -- for now.
Her main criticism was being invested in thefund (which is a popular one with this group, and, no, we are not sponsored by Fidelity) and in the large-cap value fund, which gave her too much exposure to giant-company stocks.
Lyndsey's portfolio AmountChange
To give Lyndsey more mid-cap exposure, Rich recommends putting $2,500 into the. "She should be able to buy that through Fidelity without a transaction fee."
Jill: High earnings, no savings
Jill, 34, has a peculiar situation.
Although she earns about $90,000 and has a net worth of more than a quarter-million dollars, her retirement saving has ground almost to a halt in recent years.
Only because I stood outside her window at night, playing her old E.F. Hutton commercials about financial security, did she finally throw a paltry $3,000 into her IRA by the deadline.
That wasn't the maximum she could have contributed. But, she says, "that was all the cash I had."
Jill's finances CurrentTarget
* Based on 4% annual drawdown and not including Social Security or home equity.
Needless to say, yours truly -- who didn't start saving for retirement until two minutes ago -- can hardly throw stones at Jill's contributions.
But it is, well, odd that someone with zero debt and such an ample salary -- even for a New Yorker -- wouldn't set aside money on a regular basis and save the maximum allowable amount.
At the moment, Jill is on track to end up with a nest egg of about $450,000 at age 70, which will provide annual income of about $18,000.
"I have so many clients like this," exclaimed Galia Gichon, MBA, a former investment researcher who has started a financial-consulting business in New York called Down-to-Earth Finance. "They have really good salaries -- and no savings."
I was glad to hear Jill isn't suffering from some rare form of financial apathy for which there is no cure.
True, her current employer doesn't offer a retirement plan, so Jill is on her own. No matches, no incentives, no one to process the forms for her.
Jill's portfolio FundAmountChange
Gichon acknowledges that the lack of these conveniences makes it harder to save. So she suggests the following:
I also asked Gichon to address the fantasy that stops Jill from saving: that she can use the equity in her apartment -- about $225,000 -- to fund other real-estate investments and retire on those profits.
Gichon is a fan of real estate, as well, but she points out that this approach violates the No. 1 rule of portfolio theory: diversification.
First, you don't want all your eggs in the real-estate basket, Gichon says. "Second, any decently run real-estate portfolio has cash reserves."
Because Jill doesn't have consumer debt, Gichon is actually optimistic that in a few years she can put herself in a new savings bracket.
Assuming that her
income rises by about 10% in the next couple of years to $100,000 or so
(which is likely in her field) -- and she slowly ramps up her savings
to the desired 15%, Jill will save about $1.5 million by age 70, which
would boost her annual retirement income to about $60,000, not counting
Stephanie: Working hard, saving hard
I'm not worried about Stephanie, 28. She's already contributing the 6% necessary to get the full match from her employer's 401(k) plan. (Even though she says the 25% match "sucks," I point out that her attitude would be different if she went to Ann Taylor with $100 and they gave her $125 worth of merchandise.) She just got a $9,500 commission -- her first. She used the 60% Solution budget strategy to plan the way she spent and saved the cash, and paid off her remaining credit card debt of $2,600. Give that girl some props, or whatever it is these young people say nowadays.
Stephanie's main problem, says Gichon, is that she has two nearly identical funds -- Fidelity Freedom 2040 and thefund -- and twice as much paperwork to deal with.
* Based on 4% annual drawdown and not including Social Security.
Gichon recommends that Stephanie simplify her life and roll over her IRA into her current 401(k) account, "then figure out when she wants to retire -- in 2040 or 2030."
Also, Gichon points out, it's not terribly motivating to see one account with $7,935 and another with $1,443. "It's more empowering to get a statement with over $9,000, and you're more likely to keep saving."
The main thing for Stephanie, who is married and already knows that she and her husband would like to buy a home and have a child, is to work harder to reach the short- and long-term savings goals detailed in our bible, the 60% Solution.All the planners agreed that it can be hard for young women to foresee the future and anticipate how essential these savings will be some day -- given the inevitable demands of family, our lengthening lifespans and the giant question mark that is Social Security.
All the more reason to take even the smallest steps now toward these goals.
Updated March 28, 2008