cushion to help pay for college.
Although losing a job was traumatic, the upside is that there is breathing room for college expenses. “The severance turned out to be a windfall. God opened a door.” Still, Reddic has to deal with much less income; therefore, she is ever mindful of spending. “I’m determined not to touch my retirement savings before age 59 ½ because I don’t want any penalties,” says Reddic. Despite the struggle, she chooses to stay positive: “I have been blessed with new opportunities.”
The Advice: Build up retirement savings. Use the 401(k) catch-up provision that allows individuals over the age of 50 to contribute an additional $5,000 per year. Accumulate money for retirement outside of the 401(k) and Roth IRA and invest $1,500 to $2,500 a year in a separate account.
The Action: Reddic is taking advantage of the catch-up provision in her 401(k). Given her reduction in income, she did not open any new accounts. However, once she draws her pension in January, she plans to increase savings. She says she is not overly concerned because the severance, which is in CDs and bonds until the market rebounds, covers the savings difference.
The Advice: Invest for income and minimize taxes. Buy into income-generating investments, which provide an additional income stream in the form of dividends or interest. Consider tax-free investments such as municipal bonds and municipal bond funds, which generate interest that is exempt from federal taxes, and in some cases, state taxes.
The Action: Reddic made major adjustments to her retirement savings because of the uncertainty in the stock market. She remained enrolled in the 401(k) with her previous employer, MetLife, but decided to get out of the stock market. Reddic put that money in the company’s fixed income fund, which is guaranteed to return 5.3% a year. She took the planner’s suggestion and purchased a municipal bond fund.
The Advice: Diversify holdings. Gain additional exposure by adding real estate investment trusts (REITs) to the portfolio. Take the $2,000 contest winnings and add it to Veronica’s college savings.
The Action: Reddic followed the planner’s advice and explored real estate funds. However, she says the timing proved to be poor for this advice. “The fund I invested $2,000 in tanked. I took the loss and sold it,” says Reddic. She did put the $2,000 contest winnings into a Coverdell IRA for her daughter’s college costs and kept adding to that existing account.
October 2007 Winner: Quency Hawkins
Hawkins is a newly minted landlord. In July he purchased a single-family, three-bedroom, two-bathroom home in Raleigh, North Carolina. The asking price was nearly $180,000, but he walked away with it for $163,000. Shortly thereafter, Hawkins began renting out the townhouse where he once lived. Because he still travels three weeks each month for his job as a senior instructor for a software and database company, he hired a property management company to help with his landlord duties.
Hawkins’ grandmother, whom he had been helping financially, had a stroke. “That caught me by surprise,” says Hawkins. She is