Navigating Saving for the Short-Term & the Long-Term
by Alacias Enger
Kyle is a longtime A&U reader from the Pacific Northwest. Historically, Kyle has managed to save here and there, until he lost his job in the 2009 Recession. In the years that followed, Kyle struggled with a bout of unemployment and drained his financial reserves in order to supplement his inadequate unemployment check.
Eventually, Kyle secured part-time work, which he supplemented with credit cards to keep him afloat. Kyle continued to be underemployed, working part-time, for a few years while the local economy was rebuilding. Finally, two years ago, Kyle secured full-time work as an office manager.
His compensation package includes medical, dental, and vision coverage along with access to a traditional 401(k) plan with a 6% company match. Kyle has been successful in getting his costly medications covered through a combination of his company’s medical insurance and a copay program which provides assistance with the insurance copayments associated with his prescription costs. Within a few months of carefully coordinating these resources, Kyle was able to gain control over his budget. He decided that the 20% of his budget allotted for meeting financial goals (saving or debt repayment) would be best spent eliminating the credit card debt that he incurred during his time of underemployment. Now, after diligently working his plan, Kyle is within a few short months of being free of credit card debt.
As Kyle is nearing the finish line of this goal, he is quickly realizing that he has split priorities where the rest of his financial life is concerned. Kyle’s emergency savings is not fully funded. Right now, he could scarcely cover one month of bills if something were to happen. After what happened in the last recession, Kyle would be much more comfortable with six to eight months of expenses saved. At the same time, Kyle is in his forties and has very little saved for retirement, which concerns him. He has a small 401(k) left over from a previous employer but hasn’t contributed anything since then, nor has he signed up for the plan at work because of his focus on eliminating debt.
It may be the ultimate nightmare to hit retirement age and realize that you don’t have the funds to take care of yourself, or even to be forced into retirement early for medical reasons knowing that you have no money. Like Kyle, we all have split priorities where our financial lives are concerned. While we would all like to focus on one thing only, sometimes, we need to attack multiples goals all at once.
Right now, Kyle is leaving money at the table by not taking advantage of his company’s match. Kyle’s company is going to put in one dollar for each dollar Kyle contributes, up to 6%. Furthermore, since his company’s 401(k) is traditional (using pretax dollars), he will be able to lower his taxable income each year that he contributes. That way Uncle Sam get less of Kyle’s money come tax time!
Next, he might open a Roth IRA (Individual Retirement Account). A Roth IRA uses money that has already been taxed (therefore has income limits that impact eligibility). So, qualifying distributions made in retirement will be tax-free. In other words, Kyle’s money can grow over the years, and he won’t owe taxes on the growth if he leaves it in there until retirement. His own contributions are another story. Since, Kyle has already paid taxes on the money he puts in, he is free to take it out if needed. This makes a Roth IRA opened as a savings account a good location to place money intended for retirement because it could double as an emergency savings while he is in a stage where he needs to build both types of funds. Since the IRS limits the amount an individual can contribute annually to an IRA ($6,000 in 2019 plus an extra $1,000 for those over fifty), Kyle can deposit into a Roth IRA up to the annual limit, and if there’s any money remaining, place it in a regular savings account. Eventually, as his liquid savings grows, he can move some of his IRA funds into investments with higher growth potential. For now, the Roth IRA in a savings account is a great way to get started when you have split priorities.
Many of us find ourselves in Kyle’s shoes, torn between building our emergency savings, and saving for retirement. A Roth IRA provides a path to doing both at the same time, when you’re just getting started.
Alacias Enger is a performing artist, writer, and educator. She lives with her partner in New York City, and is the founder of blogs “Sense with Cents” and “Travel Cents.” Follow her on Twitter @sense_w_cents. If you have a personal finance question you would like answered in the column, please send an email: [email protected].