The Newlyweds:
Lloyd, 32, and Courtney Young, 28 | Virginia Beach, VA
Current Savings Strategy: Lloyd and Courtney Young recently got married and have just moved into a new home. He works for Tesoro Corp., a independent refiner and marketer of petroleum products, as a quality control manager, and she works at Dominion Power, a energy utility, as a design engineer. Courtney’s employer offers her a possible pension but Lloyd’s doesn’t. Both are contributing to 401(k)s at work.
Now, they want to be more aggressive about saving. Lloyd is contributing $65 a week, about 5% of his pay, and getting an employer match. All of his money is in a target-date 2040 fund. So far, he has accumulated around $3,000.
Courtney, who has about $4,500 in her 401(k), also is contributing 5% of pay (around $160 a month) to her 401(k) and getting an employer match. Of that $4,500, about $2,700 is spread among target-date funds for 2030, 2040, and 2045, with the largest amount (38% of her account) in the 2045 fund. The other $1,800 or so is divided among a stable value fund, a small-cap value fund, a small-cap growth fund, and (to a lesser extent) a large-cap value fund.
In addition, Courtney has about $2,000 in a money market fund in a Roth IRA, rolled over from a former employer’s 401(k). Lloyd also had money—about $3,000—in a 401(k) from a former employer but he withdrew those funds to help pay expenses related to their home purchase. Even with that influx of cash, the Youngs now have $5,000 of credit card debt.
The Makeover: Given the Youngs’ situation, what might be some savvy moves for them now? Contributing enough to get the full employer match for their 401(k) contributions makes sense because they’re leaving money on the table if they don’t. “Beyond that,†says Peace of FSC Securities Corp., “their primary goals should be paying off their credit card debt and building up a cash reserve. They should have at least six months of income in a cash emergency fund.â€
What about the $2,000 that Courtney now holds in a money market fund? “That’s not really suitable for an emergency fund because it’s in an IRA,†says Peace. In case of need, Courtney will have to pay some tax and an early-withdrawal penalty to get at those funds. “The money in her IRA should be invested for their retirement,†says Peace, “not earning almost nothing today in a money market fund. She might invest in an international stock fund, to give her more global exposure.â€
In terms of 401(k) investing, Peace believes the Youngs are too reliant on target-date funds. “Even the long-dated funds usually have some exposure to bonds,†he says. “Young investors, such as the Youngs, with so many years of investing ahead of them, should be primarily in growth mutual funds.†If the Youngs are set on sticking with their current exposure to target-date funds and stable value funds, Peace recommends that all future contributions go toward growth mutual funds. “They should use a large-cap growth fund for those contributions,†he says. “At their age, they should have more growth in the portfolio than they have now.†Once they have paid off credit card debt and established an ample cash reserve, Peace recommends using the additional income to establish a Roth IRA. Those changes, Peace believes, will put the Youngs well on their way to a rich retirement.
This article originally appeared in the October 2009 issue of Black Enterprise magazine.