This week, Gail speaks about investing priorities for couples and helps a member of our military plan his long-term future.
Hi from Texas!
I am 31 and my husband is 28. My husband's salary is in the mid 50s and mine is in the low 30s. I finally earned my bachelor's degree last year and recently began a new full-time job.
My husband would like me to invest in my company's 401K plan; however, together we have approximately $25,000 in student loan debt at 8% interest, and $20,000 in credit card debt at approximately 16% interest.
I would like to devote the majority of my salary to debt reduction, and wait to begin investing until at least our credit card debt is paid off. Also we would like to buy a house, but have little savings at this time. What would you suggest?
Thanks for your help!
Dear Liz —
I'm not trying to duck the question, but you're BOTH right. It's no fun living with debt hanging over your head. On the other hand, women are much more likely to find themselves in financial jeopardy in their later years because they postponed saving early in their careers.
One of my jobs at Putnam Investments is to talk to women about the need for them to save and invest on their own. Too often I run into women who ceded all or most of the investing decisions to their husbands. In many cases, it's because they left the workforce to raise children or help aging parents. These women did so believing their husbands were "taking care of the money." However, when their husbands filed for divorce or died prematurely, they were left with little financial security. I'm not suggesting you hide investments from your husband, but you need to recognize it's just as important for you to have retirement savings as it is for him.
Every dollar you invest in your retirement plan reduces your taxable income, so, in essence, your contributions cost you less than you think. For instance, let's say the two of you have an Adjusted Gross Income which puts you in the 31% tax bracket. This means that for every $1,000 you invest in your company retirement plan, you will save $310 in income tax.
So the real, out-of-pocket cost to you is $690 ($1,000 - $310). It's even more important to contribute to your 401(k) if you employer will "match" your contributions up to a certain level. By not taking advantage of this, you are leaving money on the table. However, even if your company doesn't offer a match, you and your husband should agree on a comfortable amount each of you can contribute to your respective plans.
In order to get your debt under control, I'd recommend going to an "all-cash" budget where you BOTH agree to completely stop using your charge cards until the balances are paid off. Concentrate on paying these off first since the interest rate is twice that of your student loans. Make minimum payments on your college loans until you wipe out your consumer debt. Once your credit card debt is gone, you can focus on your student loans.
Under existing rules, you only have five years after graduation to deduct the interest on student loan debt. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 eliminates this time limit as of January 2002, so you will no longer have to be concerned about losing this deduction. According to software created by National Underwriter, starting next year, a married couple filing jointly is eligible to deduct up to $2,500 in student loan interest, provided their Modified Adjusted Gross Income is under $100,000. So the two of you certainly qualify. The income limit for a single taxpayer is $50,000. These income levels will be adjusted annually for inflation.
Marriage is a shared experience. What makes me uneasy is your suggestion that one of you shoulder the debt repayment while the other is builds up the retirement stash. That's how resentment can set in. It's just as important for the two of you to share the job of building a retirement nest egg as it is for you to share the task of re-paying your debt.
Let me know what you decide and how you're doing!
Gail, I'm a 21 year old Air Force Computer Communications Specialist. I've been enlisted for a couple of years now, and am contemplating a military retirement at the age of 38. I've recently set up a Roth IRA, where I hope to maximize the $2000/yr that is allowed in contributions until I'm in my 60s.
Can you give any good, sound advice on how to better augment my overall retirement package? I've heard differing arguments on whether to invest in high risk, or low risk funds,stocks, etc. since I'm looking at a considerable amount of time of investment.
A military career can give you a solid basis for retirement income. In essence, in return for your years of service, the people of the United States provide you with a guaranteed pension which has the added benefit of being adjusted for inflation.
However, it's clear you understand the need to save and invest in order to augment your expected military retirement income. A Roth IRA is a smart choice because it will enable the earnings on your contributions to grow tax-free, provided your account is open at least 5 years and you are at least 59 1/2 years old when you start withdrawals.
Keep in mind that starting in 2002, you can invest $3,000 in an IRA and this is scheduled to increase until it hits $5,000 in 2008. Be sure to take advantage of these higher IRA contribution limits if you can afford it. You can make this less painful by putting your Roth IRA contributions on autopilot. Starting in January, have your IRA custodian deduction $250/month from your checking account and automatically invest this according to your directions. $250 x 12 months = $3,000! You'll have your IRA contribution complete by the end of the year and won't have to rush to come up with the money by April 15.
Because you literally have decades before you plan to use this money, you can afford to take on more risk than someone in their 40s or 50s. That means I think you should be investing the majority of your IRA money in stocks. The most efficient way to get diversification with what, at this point, is a relatively small amount of money, is by owning these stocks through mutual funds.
Stock investing comes in different flavors. Some mutual fund families excel in managing funds composed of growth stocks - stocks of companies with the potential for rapid increases in earnings. Others have a good reputation for managing value stock funds, composed of stocks of undervalued companies whose current prices do not reflect their true potential. I suggest you look for a mutual fund group which has demonstrated success with both investment styles. That's because you will want to own both types of funds.
By keeping your fund investments in the same fund family, you can hold down your annual IRA custodial fees and also take advantage of breakpoints which reduce your sales charges. A good place to start your search is www.morningstar.com or a similar site which rates mutual funds.
Stocks are generally considered more risky investments because they tend to fluctuate in price more than, say, bonds. However, over the long term, equities have offered considerably better growth potential than bonds.
Furthermore, historically, stocks have provided the best protection against inflation. While past performance is no guarantee of future results, investing in a broadly diversified portfolio of stocks — or stock funds — has typically resulted in lower price fluctuations than investments in individual stocks.
Depending on your tolerance for risk, it could be a good idea for you to start out by investing half your Roth IRA contribution in a mutual fund which invests in large, value-oriented U.S.-based companies and the other half in a fund which includes large, growth-oriented U.S.-based companies.
As the years go by, you might want to add funds which invest in intermational firms, plus those that focus on small-to-medium-sized companies. In this way you will be diversified based on the size of the companies you own, across different industries (rarely do value companies fall into the same category as growth companies), as well as geographically.
Keep up the good work!
If you have a question for Gail Buckner and the Your $ Matters column, send them to email@example.com along with your name and phone number.
The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.