OUR READER
Emeka Diribe, 27
Fullerton, Cal.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Should I build my emergency fund or invest more for retirement?
When the economy began to unravel, Emeka decided he needed to save more. His goal: to sock away cash in case something happened to his job (he's a high school math teacher). So Emeka started an emergency fund and has built up a stash equal to six months' worth of expenses in an online savings account with ING Direct. Meanwhile, Emeka, who is single, is accruing retirement benefits in the California teachers' retirement system. But now, as he looks at his savings -- which also include several thousand dollars in stocks -- he's wondering whether he's doing enough. "I'm trying to find the right mix," he says.
About 20,000 teachers were laid off in California last year, and Emeka wants to squirrel away as much as he can. Should he bulk up his emergency-fund savings to cover a year's worth of expenses? He could open an IRA, but he says he doesn't like the idea of tying up his money. And he'd like to have money to buy a house someday.
Emeka is off to a good start. If the past two years have taught us anything, it's the importance of having financial reserves and living within our means. He chose well by putting his savings in an ING account. ING has no maintenance or withdrawal fees, and it pays 1.3% interest, which is higher than the rate the average money fund pays.
But does someone who is young and single need an enormous emergency fund? Teaching may not be a lucrative occupation, but it's more secure than most jobs. Emeka should think about two issues: how long it would take to find a new position if he needed to, and whether he would feel more secure with a bigger buffer.
Usually, being able to cover three to six months' worth of expenses is sufficient. But with jobs hard to come by, a larger stash makes sense. "If he has a year's worth of savings and he loses his job, he won't have to take the first offer that comes along," says Michael Eisenberg, of Eisenberg Financial Advisors, in Los Angeles. (See "How Much Cash You Really Need".)
FOCUS ON RETIREMENT
Once Emeka fattens his fallback fund, he should concentrate on retirement savings. He'd benefit from opening a Roth IRA, to which he can contribute $5,000 in 2010. His money will grow tax-free, and he can withdraw his contributions without a penalty if he needs the money before retirement. Plus, having a Roth will diversify his retirement savings.
Herb Montgomery, a financial planner in Orleans, Mass., uses the following example. Two friends, Jeff and Susan, join the same firm at age 22. Both aspire to retire in 40 years. Susan immediately opens a Roth IRA, contributes $5,000 a year for ten years, and stops. Jeff waits until he's 32 to open a Roth, but then invests $5,000 a year for 30 years. Assuming an 8% annual return, at retirement Susan would have $787,000, and Jeff would have $612,000. Susan's head start is worth that much. The lesson for Emeka: The benefits of tax-deferred savings outweigh the chance he'll be sacked from the classroom.
-
Four Key Elements of a Good Estate PlanAn estate plan can be complex or simple, depending on your estate and your wishes, but every estate plan should accomplish these basic goals.
-
Stock Market Today: Stocks Rise as Fed Rate Cuts NearThe main indexes closed out the day and week notably higher as excitement swirls ahead of next week's rate cut.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
Six of the Worst Assets to Inheritinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
403(b) Contribution Limits for 2024: Good News for Teachersretirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
-
SEP IRA Contribution Limits for 2024SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
-
Roth IRA Contribution Limits for 2024Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024simple IRA The SIMPLE IRA contribution limit increased by $500 for 2024 and workers at small businesses can contribute up to $16,000 or $19,500 if 50 or over.
-
457 Contribution Limits for 2024retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2024retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
