Meghan Nelson

Seeking a Work Niche and Taking the Long View

Sunday, April 29, 2007

Meghan Nelson, 23, is a free spirit, but at the same time, she worries about having enough to live on in retirement. Her grandfather is 100, and that makes her aware of the need to save.

"I realized that if I were to retire at 65, I'd still need enough to sustain me for potentially 35 more years," she said.

Nelson has degrees in communications and public relations from Pacific Union College in California and hopes to find a job in which she can use her creativity. Now she's doing temporary work, making about $200 a week. While she's deciding on her next move, she plans to return to making wedding videos for income.

In the meantime, she's reading, studying music and taking courses in Arabic at the USDA Graduate School and the Islamic Center -- her gesture toward creating understanding between the West and the Islamic world. Last year she traveled extensively, but this year, because of concerns about aircraft emissions and because she doesn't want to draw down her retirement accounts, she's decided to limit her travel.

She has health insurance for which she pays $78 a month through her temp agency. She lives with her dad in Bowie, which helps cut expenses. Nelson has neither student nor credit card debt and spends relatively little, though she says she has a weakness for chocolate.

"I cut my own hair. I rarely shop for clothes," she said. "I sometimes sew my own clothes or alter my repository of second-hand pieces."

Nelson has been contributing to a Roth IRA for two years, putting in the full $4,000 allowed each year. Her retirement funds are invested in a U.S.-China growth mutual fund and a Vanguard medium-cap index fund. She also has about $3,000 in an interest-bearing online checking account.

She wants to know how much she should be saving toward retirement as she tries to define more immediate goals. "It's the start of a new period, so I'm excited by the possibilities," she said.

Build an Emergency Fund and Contribute To a Work Savings Account

Research economist Anthony Webb saw a lot to like about Nelson's situation. "She doesn't have any student loans, has avoided taking on credit card debt, has health insurance and is managing to live within her means, even though she doesn't have a full-time job."

And he had a message for her -- that it's okay to eat chocolate sometimes and also occasionally okay to not be saving for retirement, as long as you don't make a habit of it.

He noted the difference between a traditional IRA on which taxes are deferred until you draw the money and a Roth IRA, in which funds are taxed going in but not coming out. "Right now, Meghan's income is probably too low for her to get much benefit from the tax deduction on a traditional IRA," he said. "So she has made a smart move by choosing a Roth."

Financial planner Sue Stevens said Nelson should look for a job that has a 401(k) or 403(b) plan and try to contribute at least $300 a month once she takes a permanent job. By the time she is 40 -- if not sooner -- she should be contributing the maximum allowed, Stevens said.

Webb and Stevens both thought that the $3,000 in Nelson's checking account is not enough to serve as an emergency fund. Stevens suggested that she bump it up to about $5,500, or enough to cover about three months of expenses.

Webb noted that investment allocation "is all about trying to get the best possible trade-off between risk and return." He continued, "One way of doing this is by diversification, and I am concerned that she has put a lot of her eggs in a China basket." International exposure is fine, but she might be better off with a broad-based international fund, he said.

And he had one final word of advice based on her concerns about aircraft emissions. She might want to think about funds that invest with environmental considerations in mind. Webb said there is no evidence that "ethical" funds do worse than regular funds. "This is one situation where doing the right thing won't cost her anything," he said.

© 2007 The Washington Post Company