Considering Business School While Balancing Saving
Christopher Scoville, 25, says he thinks about saving for retirement a lot more than his peers in part because it's in his blood.
"I come from a family of savers," he said. "I've inherited that. Any purchase generates lots of anxiety."
Scoville graduated from Duke University in May 2005 and moved to Philadelphia to work for a new nonprofit organization, which failed. Still in that city, he works in development and communications for Equality Forum, a nonprofit group that produces documentaries and hosts educational forums on the history of gay, lesbian, bisexual and transgender people.
He makes $35,000 a year and has good health and dental insurance. His employer offers a 403(b) retirement plan -- a savings option offered by educational institutions and nonprofit groups similar to a 401(k) -- and Scoville is thinking about contributing 4 to 6 percent of his income, which he hopes his employer will match.
In his previous job, Scoville put 10 percent of his income into a money market fund paying 4.5 percent, and that account now has $3,500 to $4,000.
He also owns shares of Sirius Satellite Radio and XM Satellite Radio, bought with about $2,000 his mother gave him after he opted for the family's old 1995 Ford Escort rather than a new car his parents had offered to buy. He paid about $1.50 a share for the Sirius stock and about $5 a share for XM. Those investments have appreciated; Sirius shares now trade around $3, and XM shares are trading above $10.
Scoville graduated from Duke free of student loan debt, thanks to multiple scholarships and stipends. But while he was between jobs, Scoville ran up about $2,500 in credit card debt. Those cards are interest-free until March 2008, and he is paying as much as possible each month to eliminate the debt. As of last month, he had paid off $1,000.
Eventually, Scoville says, he wants to go to business school and study nonprofit management, with the goal of working at a larger organization such as Amnesty International.
Scoville says his focus on savings was sharpened by his mother's sudden death last year. He also says he doubts that Social Security will be there by the time he needs it.
"My generation is screwed," he said.
Diversify Stock Holdings And Open a Roth IRA
Research economist Anthony Webb and financial planner Sue Stevens agreed that Scoville needs to pay his credit card debt before it begins accruing interest and should begin to set aside money for graduate school.
"He might want to think about opening either a Roth IRA (withdrawals for qualified expenses of higher education don't attract the 10 percent withdrawal penalty) or a college savings plan," Webb said.
A Roth IRA is more flexible, so if Scoville doesn't go to business school or ends up winning a scholarship, the money can be left to grow until retirement, when it can be withdrawn tax-free.
Stevens said Scoville should start contributing to his retirement plan, and he should add about $200 a month to his money market account until it reaches about $6,250. That money should then serve as an emergency fund.
Webb said he was concerned about Scoville's stock investments. The key to successful investing is to get the best possible tradeoff between risk and return, he said. "You accomplish this by portfolio diversifications, and a portfolio of two small-cap stocks, both in the same sector, is not diversified."
"If Christopher wants to play the market, I suggest he set aside a small amount of money for this purpose," he said. But most of his retirement savings should go to professional fund managers. Stevens suggested that Scoville build "core positions in broader mutual funds first and then earmark 10 percent or less of his overall portfolio to speculative investing."
Stevens noted that Scoville has already doubled his money, but she added that both stocks have been losing ground over the past two years. She suggested that he consider selling Sirius, which is trading at more than Morningstar's analysts feel is its fair value.