Saving while young can mean retiring early
By Sandra Block
David Conner of Knoxville, Tenn., is only 22 but he's already looking ahead to retirement.
He has a Roth individual retirement account and recently started contributing to his employer's 401(k) plan. He also invests $500 a month in a taxable mutual fund account. He is debt free and hopes to buy a house in three years.
Conner, a loan officer at a bank in Maryville, Tenn., says he has been working and saving since he was 14, and hopes his early discipline will allow him to retire at 50.
Financial planners wish more young singles followed Conner's example, but it's a hard sell.
A study sponsored by Oppenheimer Funds and Third Millennium, a Generation-X advocacy group, found that half of single women ages 21 to 34 believed that at this time in their lives, money is for spending, not saving. About 54 percent said they were more likely to have 30 pairs of shoes than $30,000 in retirement savings.
Many young singles wait for a milestone to occur in their lives, such as getting married or having children, before they start saving and investing, says Richard Thau, president of Third Millennium. But unlike their parents, who often got married in their early 20s, many of today's singles are waiting until they're in their 30s or 40s to get married, if they marry at all.
So it's a good idea to rethink your finances for the years immediately ahead.
Just start saving. Putting even a small amount of money into your employer's retirement savings plan can pay off enormously.
"If you start when you're young, you should have a substantial portfolio by the time you're 40," says David Kay, a financial planner in Dayton, Ohio. If your employer matches your contributions, all the better.
Ten or 20 years from now, you could be facing even more expenses, such as a home mortgage, childcare and your children's college tuition. If you start making contributions in your 20s, you won't have to save as much when other obligations start piling up.
You'll reduce your taxes as well. If you're single, childless and a renter, you've got a target on your back as far as taxes are concerned. Contributing to a 401(k) plan will lower your taxes by reducing your taxable income.
Buy a house. Declining interest rates and low down payment programs have made mortgages affordable for many one-income households, says Nancy Flint-Budde, a financial planner in Clifton Park, N.Y.
Your income may qualify you for first-time buying programs that may be off-limits to dual-income married couples.
Buying a home can be a good investment, depending on where you live. It can lower your taxes, because interest on the home mortgage is deductible.
But don't buy a home if you think you'll move within the next five years. You need to stay in your home that long to recoup your home-buying costs, Flint-Budde says. In addition, don't underestimate the cost of maintenance, insurance and taxes.
Meantime, plan for the worst. If you're single, a job loss, serious illness or accident can be catastrophic. You can't rely on a partner's income to pay the bills while you get back on your feet.
Make sure you have disability insurance, which will replace your income if you're unable to work. Your company may offer it, but if you can increase your coverage by paying extra, it's worth the cost, says Scott Kahan, a financial planner in New York.
Build a good-sized emergency savings account. Everyone should have several months' worth of expenses in a money market fund or similar account. Flint-Budde suggests six months to a year's worth.
Plan your estate. At the very least, you should have a will, which ensures that your assets are divvied according to your wishes.