In uncertain times, finding financial security
Nakia Haskins, 32, needs to resolve her current cash crunch without jeopardizing her future retirement goals.
(Money Magazine) -- Nakia Haskins doesn't scare easily. After all, she's an assistant principal in a tough New York City public school.
Yet the prospect of coming up short of cash terrifies her. And like most thirtysomethings, she's faced with mounting financial pressures.
Haskins has been contributing 15 percent of her salary to the school system's retirement plan in hopes of ensuring a comfortable future.
But stock market losses make her nervous, and she needs extra cash to fund a 529 college savings plan for her son Myles Brown, 3, as well as repairs on her recently purchased Brooklyn brownstone.
Unfortunately, her emergency fund dipped to just $6,500 last year when, due to a quirk in union rules, she earned only two-thirds of her salary for the first eight months she was on her job.
Now, with her income back to the full $90,000 and a big tax refund expected shortly, she's eager to make sure her investments are on track.
"I'm not sure how to prioritize," she says.
Where she is now
Haskins might feel anxious, but in fact, she's ahead of many of her peers, says Brooklyn financial planner C.E. Scott Brewster.
So far she's amassed $31,500 in the teacher's retirement plan, and she has $26,100 in an old 401(k). Plus, unlike most young workers, Haskins is eligible for a generous pension.
If she continues working in the New York City public schools, her pension will replace 60 percent of her income when she retires.
"That will be almost enough to cover her living costs," Brewster says.
What she should do
Saving for the future is great, but Haskins needs to also make sure she can cover today's expenses. Luckily she can increase her take-home pay by at least $1,800 a month by having less taxes withheld from her paycheck.
Last year Haskins' tax refund was a whopping $18,000 - which amounts to a big loan to Uncle Sam, says Brewster.
She should adjust her withholdings to reflect her status as a head of household and a homeowner.
Also, she's forgetting to claim a state income tax deduction on her 529 contributions.
And Haskins can comfortably scale back on funding her retirement plan; as long as she works for the school system, 7 percent to 10 percent of her salary should be enough.
"Even if she leaves the public schools in the next few years, she won't be too far behind," Brewster says.
Next, Haskins should restock her emergency fund. As the sole family income provider, she should keep at least three months' worth of living expenses, or $15,000, in a high-interest savings account such as HSBC Direct.
She should also put $300 a month in Myles' 529 account. Then she can use the additional cash for home repairs.
Finally, Brewster has unusual investment advice for someone so young: Lighten up on stocks.
Right now 80 percent of her retirement plan contributions go toward equities. But since she's nervous about losing money, she'd do well to move a sizable chunk of her current retirement fund into a teachers' retirement-system guaranteed fixed annuity that yields 8.25 percent through June 2009 (and will never fall below 7 percent).
"That could easily beat the return of stocks over the long run without the risk," Brewster says.
She should also roll her old 401(k) over into an IRA and invest it in a target-date retirement fund, which selects an age-appropriate mix of stocks and bonds automatically.
Haskins is pleased with this lower-risk approach to retirement savings. "I just want to set everything up so I don't have to worry," she says.
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