retirement

Money Makeover: Is saleswoman on track?

 

 

AliciaAlicia, 32, gets paid on commissions, so she needs to keep a healthy emergency fund for dry spells. But she's more concerned about retirement.

Will she have enough money saved?

The Challenge

Alicia's new job required training for two months, during which she wasn't paid ... more

The Solution

Alicia is in great shape, but there are a few things she should do to enhance her current and future financial security ... more

The Plan in 5 steps
Step 1: Tap the cash reserve and pay off the credit card balance now.
Step 2: Roll over 401(k) to new employer, improve asset allocation and reduce fund expenses.
Step 3: Open and fully fund a Roth IRA beginning with tax year 2011.
Step 4: Consider increasing 401(k) contributions even further.
Step 5: Look for greater efficiency in your use of cash and day-to-day expenses.
 

The challenge

Alicia, 32, is a lifelong resident of Texas and works in sales for a communications company. Although she just recently changed employers, she has worked in the same field for five and a half years.

Most, but not all, of her pay comes through commissions. With the job change, she has spent two months in training and that's two months she hasn't been collecting commissions. But her commission income kicks in next month, and she expects to quickly be back to more customary monthly income levels.

Given the unpredictability of commission income, it is important to have an adequate savings cushion and a good handle on monthly expenses. Alicia has both of these bases covered. She closely evaluates her spending and makes conscious decisions on discretionary spending. As a result, she routinely saves $1,000 to $1,500 per month and has accumulated an emergency savings cushion of more than one year's worth of expenses in a dedicated savings account earning 0.7 percent. Additionally, she has the equivalent of nearly three months' expenses in her checking account. She also has $2,000 sitting in cash in an online brokerage account.

Her obligations: Alicia has $26,000 in student loans she consolidated after graduation at a fixed rate of 4.54 percent. She pays $199 each month, the minimum required. Due to her income, she is no longer eligible to deduct the interest from her taxes. She has $7,500 remaining on a car loan through her local credit union with a low fixed-interest rate of 2.65 percent.

There is also an outstanding credit card balance of $2,000 she plans to pay off with her first commission check. She put expenses on her credit card for a couple of months after the job switch because she wanted to conserve cash until the commission checks resumed. Alicia says she "probably won't use the credit card again" once it's paid off, as she views credit cards as just for emergencies. Instead, she typically uses her debit card -- 20 or more times per month -- for expenses.

Alicia rents an apartment, having recently moved closer to work, and she's not considering buying a home in the foreseeable future. She says such a step may be 10 years away.

Her retirement plan: Alicia has a $30,000 401(k) balance at her former employer she plans to roll over to her new employer's plan. Her investment allocation is a little off, something that should be rectified sooner rather than later. She does not have an individual retirement account, or IRA.

Her new employer's 401(k) plan doesn't have an employer match during the first year of employment, but afterward they'll match two-thirds of her contributions up to 10 percent. She has signed up to begin contributing 10 percent, and this will be enough to maximize the employer match once it kicks in next year. Any matching funds from her employer won't be fully vested for five years.

Her company also offers a pension program that is fully funded by the company. Participation begins after one year, and she'll be fully vested after five years. Benefits begin at age 65 or with a reduced amount at age 55. If Alicia stays with her employer, then over time this could be another leg on the retirement savings stool.

Her dreams: She has been considering starting a small business on the side but has been reluctant due to the $10,000 to $15,000 initial commitment.

Alicia is worried about not having enough in retirement for her age, and she's seeking the Money Makeover to help figure out how she can be on track to retire by age 67.

Key issues:

  • Plenty of emergency cash, but holding a $2,000 credit card balance at 14.9 percent.
  • Allocation of existing 401(k) balance needs some tweaking.
  • She doesn't have an IRA.
  • All taxable assets are held in cash and not earning optimum yields.

Next: The Plan »

 

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