Four years after landing an engineering job with Sunoco, Ian MacKinnon, 26, is eager to make his savings work for him. By living frugally, the former college athlete has paid off his student loans and amassed $25,000 in a savings account. MacKinnon also contributes 15 percent to 20 percent of his paycheck to his company’s 401(k) and qualifies for his employer’s 5 percent match. Despite this cushion, MacKinnon says his strategy needs a jolt. He insists that at least $10,000 remain in the bank, but he’s eager to earn higher returns on the rest of his money. Still, he doesn’t want to put all of the remaining $15,000 at risk. He anticipates buying a house and a new car and going to graduate school, but he doesn’t expect to take on any of those obligations in the next five years.
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MacKinnon’s financial start puts him ahead of many — if not most — of his peers. But his story is also a reminder that there’s a long, long time between the first job and the last. Financial planners say it’s easy but wrong to overemphasize retirement savings when you’re unlikely to be retired for a few decades.
Timothy Maurer, vice president of the Financial Consulate in Hunt Valley, Md., says MacKinnon deserves kudos, but calls MacKinnon’s current strategy a barbell scenario. That means he’s heavy on the two extreme ends — short-term emergency cash and retirement savings — but has left a gap in the middle.
Maurer recommends MacKinnon fill the void by divvying up his resources into fourths. Because he already has the two ends covered, he can keep $10,000 in cash accounts that are easily accessible and divide the rest between a taxable brokerage account and a Roth IRA, to which he can contribute up to $5,000 in 2011. Unlike his 401(k) contributions, MacKinnon’s contributions to the Roth may be withdrawn at any time without taxes or penalties. Meanwhile, growth-oriented mutual funds would be best for the brokerage account.
Richard Salmen, a senior adviser with GTrust Financial Partners of Topeka, Kan., recommends that MacKinnon choose mutual funds whose objectives are in synch with his 401(k) and will compensate for any gaps. A basic fund, such as Vanguard Total Stock Market Index Fund (symbol VTSMX) or Vanguard Total Bond Market Index Fund (VBMFX), should work well alongside just about any 401(k).
There is one thing that could upset MacKinnon’s apple cart, Salmen says — a serious relationship. When a couple begins to think about commingling finances, he suggests that they first consult a financial adviser for a basic if unromantic chat.
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