Leah S. Tang is a Generation X member, but doesn't want her finances to look it.
Although some might see her as just another "slacker," the 29-year-old health-care administrative assistant is really a saver. Already planning for her retirement, Tang wants to develop a strategy that will allow her to stop working by age 65 and begin traveling the world.
That shouldn't be too difficult for this Long Beach resident, said Norman B. Boone, a certified financial planner in San Francisco, who reviewed her finances. He thinks that for her age, Tang is pretty unusual in her foresight.
In fact, she's making the most important financial move anyone can make: planning early for retirement, he said. Even a few years can make a huge difference in retirement planning calculations, Boone said. That's because of something called compound interest. And it's going to help Tang get where she wants to go, Boone said.
"Unlike many people your age, you are clearly focused on the future--a typical Midwest approach," he told Tang, who grew up in Kalamazoo, Mich. "Midwestern people are real practical about things like that."
The challenge now for Tang, who is single and lives alone, is creating a retirement savings plan for the long haul.
She makes $42,000 a year and already has a nice nest egg of $16,300, a good start for someone her age, Boone said. It includes $2,100 in shares of National Semiconductor, a $7,900 individual retirement account in PBHG Growth Fund (five-year average annual return: 30.9%) and $3,300 in SteinRoe Capital Opportunities Fund (five-year average annual return: 22.5%). She has $3,000 in a checking account.
Tang finds herself spending most of her $2,100 in monthly take-home pay after she contributes to her pension plan. Her rent is $675 a month. She estimates that she spends $250 a month on groceries, $300 on entertainment such as eating out and sailing, $40 on utilities, $80 on her phone bill, $80 on gasoline, $35 on a cellular phone, $140 on car insurance and $200 on clothes.
She pays $250 a month on an $11,000 student loan, more than the $190 required payment. Her car is paid for, and she has no credit card debt. Although she enjoys sailing and tennis, she stays focused on her career.
One day, Tang would like a family, but she considers that icing on the cake. These days, she mostly lives by words her mother taught her: "Never rely on a man to take care of you."
Still, she is open to finding someone to share her life with.
"I'd love to meet Mr. Right," Tang said. "But as you turn 30, it gets harder and harder. I want to take care of myself."
Tang should have no problem with that, said Boone, who assumed for this plan that Tang will continue to stay single and without children. A change in those conditions would make a huge difference in her retirement planning.
Because Tang is at the beginning of her career and expects to increase her income over the years, she can achieve her goals, Boone said. But she must be careful and expand her expenses at a slower rate than her income. She should also save an increasing percentage of her income, which would allow her to retire earlier than 65 and with a greater degree of comfort.
If Tang retires at age 65 and lives until age 90, as she expects, she will have a lot of time to enjoy the benefits of compound interest, something Albert Einstein once called the eighth wonder of the world.
She has 36 more years to save and invest and 25 more years while retired to defer taxes in her retirement accounts as she slowly draws out just enough to support her living requirements. She should be able to enjoy average annual returns of 9% or better, which means her investments could double in value every eight years because of compound interest earnings.
For every $1,000 she needs in retirement from her savings, she will need to accumulate $19,500, Boone said. For example, if she wants $50,000 in annual income when she retires, she'll need to accumulate $975,000 by the time she expects to retire in order for her money to last 25 years.
So if Tang wants to assure herself of a retirement income of $50,000 a year in today's dollars, in addition to Social Security, she should save and invest about $325 a month, Boone said. And she already is putting aside more than that each month, with about $230 going into her pension account and her employer putting in $175 more. The money is invested in an aggressive-growth stock account.
Boone advises that every time Tang gets a raise, she permit herself to increase her spending by half of the increase of her take-home pay; the other half should go to bolster the amount she is saving each month. For example, if Tang gets a $200-a-month raise, $80 might go to taxes, which means her take-home would increase by $120. She should take half of that, $60, and add it to the amount she is already saving each month.
Getting such an early start on saving will pay huge dividends for Tang, given the enormous power of compounding.