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 solution

Alicia is in great shape, but there are a few things she should do to enhance her current and future financial security. She can begin by tapping some of the savings to pay off the credit card balance now. This will save her about $25 in interest expense compared to waiting until next month for the initial commission check.

Change investment allocations: Alicia's current 401(k) balance is entirely invested in equities, which is fine for a retirement account at her age. After all, she may not tap this account for 30 years or more. The investment allocation needs some tweaking, however. She has no international exposure, and she is underweighted toward large-company stocks, with just 12 percent of her account dedicated to them. With expense ratios of more than 2 percent, the large-company stock funds in her former employer's 401(k) are very expensive, especially for mutual funds holding stocks of large companies. A broad index fund such as a Standard & Poor's 500 index fund would be a lower cost alternative, either in the current plan or her new employer's plan.

Alicia doesn't currently have an IRA, so she should open a Roth IRA and tap her savings to fully fund a $5,000 contribution for tax year 2011. The Roth IRA won't give her any tax deduction on her contributions like the 401(k) but will permit tax-free withdrawals of all future growth. This Roth IRA can be used to round out her overall asset allocation by adding such tax-inefficient investments as commodities and real estate investment trusts, that may not be available in her new employer's 401(k).

In addition to tapping the savings to pay off the credit card and fund a Roth IRA, an additional option would be to use the cash that exceeds 12 months' worth of expenses to invest in an exchange-traded fund, or ETF, or a mutual fund that holds dividend-paying stocks. The yield is considerably higher -- and the tax rate lower -- than cash and many bonds, yet she'd still have one year's worth of runway before having to access the money in the event of a job loss.

Maximize retirement accounts: There are several possible uses for the additional cash she's still able to put aside every month. She can choose to deploy this money in one or more of the following ways: accumulate $5,000 for next year's Roth IRA contribution, save up for her eventual business venture, further increase 401(k) contributions or make additional taxable investments.

Eligibility to make a $5,000 Roth IRA contribution for 2012 opens up Jan. 1. Her annual 401(k) contribution limits are $16,500 -- provided her employer permits her to defer that much -- so there is the possibility of substantially increasing her deferrals. And starting the side business is very doable at some point in the next couple of years, so setting aside some cash to meet that goal is also a worthwhile pursuit.

Search for better yield: In terms of emergency savings, Alicia is currently earning 0.7 percent in her savings account, but there are a couple of opportunities to increase her take without sacrificing safety or access to the money. The first option would earn an additional $135 annually by parking one year's worth of expenses in one of the high-yield online savings accounts listed at



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