Leah S. Tang is a Generation X member, but doesn't want her finances to look it.
Although some might see her as just another "slacker," the 29-year-old health-care administrative assistant is really a saver. Already planning for her retirement, Tang wants to develop a strategy that will allow her to stop working by age 65 and begin traveling the world.
That shouldn't be too difficult for this Long Beach resident, said Norman B. Boone, a certified financial planner in San Francisco, who reviewed her finances. He thinks that for her age, Tang is pretty unusual in her foresight.
In fact, she's making the most important financial move anyone can make: planning early for retirement, he said. Even a few years can make a huge difference in retirement planning calculations, Boone said. That's because of something called compound interest. And it's going to help Tang get where she wants to go, Boone said.
"Unlike many people your age, you are clearly focused on the future--a typical Midwest approach," he told Tang, who grew up in Kalamazoo, Mich. "Midwestern people are real practical about things like that."
The challenge now for Tang, who is single and lives alone, is creating a retirement savings plan for the long haul.
She makes $42,000 a year and already has a nice nest egg of $16,300, a good start for someone her age, Boone said. It includes $2,100 in shares of National Semiconductor, a $7,900 individual retirement account in PBHG Growth Fund (five-year average annual return: 30.9%) and $3,300 in SteinRoe Capital Opportunities Fund (five-year average annual return: 22.5%). She has $3,000 in a checking account.
Tang finds herself spending most of her $2,100 in monthly take-home pay after she contributes to her pension plan. Her rent is $675 a month. She estimates that she spends $250 a month on groceries, $300 on entertainment such as eating out and sailing, $40 on utilities, $80 on her phone bill, $80 on gasoline, $35 on a cellular phone, $140 on car insurance and $200 on clothes.
She pays $250 a month on an $11,000 student loan, more than the $190 required payment. Her car is paid for, and she has no credit card debt. Although she enjoys sailing and tennis, she stays focused on her career.
One day, Tang would like a family, but she considers that icing on the cake. These days, she mostly lives by words her mother taught her: "Never rely on a man to take care of you."
Still, she is open to finding someone to share her life with.
"I'd love to meet Mr. Right," Tang said. "But as you turn 30, it gets harder and harder. I want to take care of myself."
Tang should have no problem with that, said Boone, who assumed for this plan that Tang will continue to stay single and without children. A change in those conditions would make a huge difference in her retirement planning.
Because Tang is at the beginning of her career and expects to increase her income over the years, she can achieve her goals, Boone said. But she must be careful and expand her expenses at a slower rate than her income. She should also save an increasing percentage of her income, which would allow her to retire earlier than 65 and with a greater degree of comfort.
If Tang retires at age 65 and lives until age 90, as she expects, she will have a lot of time to enjoy the benefits of compound interest, something Albert Einstein once called the eighth wonder of the world.
She has 36 more years to save and invest and 25 more years while retired to defer taxes in her retirement accounts as she slowly draws out just enough to support her living requirements. She should be able to enjoy average annual returns of 9% or better, which means her investments could double in value every eight years because of compound interest earnings.
For every $1,000 she needs in retirement from her savings, she will need to accumulate $19,500, Boone said. For example, if she wants $50,000 in annual income when she retires, she'll need to accumulate $975,000 by the time she expects to retire in order for her money to last 25 years.
So if Tang wants to assure herself of a retirement income of $50,000 a year in today's dollars, in addition to Social Security, she should save and invest about $325 a month, Boone said. And she already is putting aside more than that each month, with about $230 going into her pension account and her employer putting in $175 more. The money is invested in an aggressive-growth stock account.
Boone advises that every time Tang gets a raise, she permit herself to increase her spending by half of the increase of her take-home pay; the other half should go to bolster the amount she is saving each month. For example, if Tang gets a $200-a-month raise, $80 might go to taxes, which means her take-home would increase by $120. She should take half of that, $60, and add it to the amount she is already saving each month.
Getting such an early start on saving will pay huge dividends for Tang, given the enormous power of compounding.
Someone who starts at age 29 and saves only about 2,000 a year (Tang is saving more), will by age 65 have $438,632, or $122,831 adjusted for inflation. If that 29-year-old waited just another six years and started at age 35, the amount drops almost in half, and he or she would accumulate $266,427, or only $74,608 adjusted for inflation.
But saving alone isn't enough. Tang needs to invest wisely.
She's been making some good decisions, but she could do better. Boone advises that Tang doesn't have enough money to adequately diversify her ownership of individual stocks, so she should sell her shares of National Semiconductor. He said that if she finds a company she has special knowledge of, such as a medical company with a good product, she could invest there, although that would be risky too.
Because she is young, her retirement funds should be invested fairly aggressively in mutual funds. Boone recommends she keep her money in the two funds she has (SteinRoe Capital and PBHG Growth), but put additional savings into other areas. He recommends she put 30% in small U.S. company stocks, 30% in large U.S. company stocks and 40% in foreign stocks, some of which should be invested in companies based in developing countries around the world.
Boone, a fee-only planner who gets no commissions from the investments he recommends, said funds she could consider include Cohen & Steers Realty (five-year average annual return: 18.3%), Hotchkis & Wiley International (five-year average annual return: 14.9%), Templeton Developing Markets (five-year average annual return: 11.7%) and Vanguard Index 500 (five-year average annual return: 17.9%).
In addition to retirement funds, Tang wants a six-month savings safety net to carry her should she lose her job. Boone advises she set aside $11,400, which will cover six months of living expenses, in safe investments.
For the safety net fund, she could keep $5,000 in a tax-free money market account and $6,400 in a stable tax-free bond fund that will have slightly higher interest rates than the money market account, probably with average maturities of two years or less. Both should invest in tax-free municipal bonds to avoid adding to Tang's tax burden.
For a muni bond fund, he recommends she look at USAA Tax-Exempt Short-Term Fund (five-year average annual return: 5.1%; current yield of 4.39%), which is good for Tang because of its low risk, low volatility and competitive returns. He recommends a national fund rather than a California fund, which would be exempt from state and federal taxes, because it would meet her other long-term criteria of real low volatility and low risk.
For a tax-free money market fund, he recommends a USAA Tax-Exempt California Money Market Fund (current yield of 3.27%).
Tang wants to buy a Volvo or a BMW in three years, and that might be difficult to do, the planner said. If she saves $350 a month for five years for the car and invests it at 6%, she will have about $25,000. Given her other savings goals, this might be too much for Tang, Boone said. He recommended she set her sights on less expensive transportation.
Tang dreams of having a house in seven years, but that could be nightmare for Tang given her long-term goals, Boone said. Because housing is an investment that some analysts like Boone don't expect to grow much, and because Tang is committed to her career and wants to be mobile in case better job opportunities arise, she might be better off staying a renter, he said. Her ability to stay mobile and substantially increase, perhaps even double, her salary at a new job would outweigh the tax benefits of home ownership.
If she were further along in her career and wanted to stay long enough in the house so that it would be paid off by the time she retires, that might be another story.
So what does Tang get from her money make-over? A blueprint for the future that will allow her to reach her retirement goals. And for other Gen-Xers, she offers a lesson in how planning early for the future will pay off.
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This Week's Make-Over
Investor: Leah Tang
Occupation: Health-care administrative assistant
Annual income: $42,000
Primary investment goal: Save for retirement and have six months of living expenses set aside.
Stocks and mutual funds $2,100 National Semiconductor shares
$7,000 PBHG Growth Fund
$3,300 Stein Rowe Capital Opportunities Fund
Money Market Funds:
$1,402 TSA Money Market Funds
$3,000 checking account
Retirement: Continue setting aside at least $325 a month to ensure an annual income of $50,000 in today's dollars when she retires.
Emergency reserve: Put aside $11,900 for a six-month reserve, invested in money market accounts and bond funds.
Investments: Sell National Semiconductor. Invest retirement funds fairly aggressively in mutual funds, with 30% in small U.S. company stocks, 30% in large U.S. company stocks and 40% in foreign stocks, some of which should be invested in companies based in developing countries.
Recommended New Portfolio
PBHG Growth Fund, (800) 433-0051
Cohen & Steers Realty Shares, (800) 437-9912
Hotchkis & Wiley International, (800) 346-7301
Templeton Developing Markets, (800) 292-9293
Vanguard Index 500, (800) 662-7447
USAA Tax-Exempt Short Term, (800) 382-8722
Money market account:
USAA Tax-Exempt California Money Market, (800)382-8722
Meet the Planner
Norman B. Boone is a certified financial planner in San Francisco. His firm, Boone & Associates, specializes in helping business owners, corporate executives and affluent individuals. He holds an undergraduate degree from Stanford University and an MBA from Harvard University.