Nancy Newkirk excels at making her money stretch. On just $30,000 a year from her job working for the state of North Carolina, and about $5,000 a year in child support payments, she has managed to care for herself and her child, purchase a home, and avoid credit card debt.
But the Greenville, N.C., 36-year-old fears that, given her current cash flow, she won’t be able to achieve her next two big goals: funding her retirement account and saving for her 8-year-old daughter Nevaeh’s college education.
“I live a very frugal and modest life. I save as much as I can,” says Newkirk, who provides benefits-related customer service for the state’s Department of Health and Human Services. “I want to be able to live and travel when or if I decide to completely stop working, but I am very worried I may have waited too long to start saving. I also worry that I am not educated enough to teach my daughter about this topic, so that she doesn’t make the same mistakes that I have made.”
Newkirk’s tight budget and lack of financial confidence are steep barriers, but she is now doing two things that many Americans find difficult: living within her means and saving 10% of her income in her retirement accounts. She owes just under $49,000 on her mortgage. Yet her situation is still precarious: Most months, once she has covered expenses and put away her savings, she lives paycheck-to-paycheck.
Her retirement savings are divided: She’s currently directing 6% of her salary to help fund her state pension, while 4% goes to North Carolina’s state employee 401(k). That latter balance stands at just $1,428, but should grow as she continues to set money aside.
With 10% of her income already going toward retirement, Newkirk says, it is a challenge to free up any more money to set aside for an emergency or education. She has only about $500 in her cash accounts. Her car is underwater—Newkirk owes $12,000 on it, though it’s worth only an estimated $2,000—but it will be paid off by 2020.
What to Do Now
Since every penny counts so heavily for Newkirk’s plans, MONEY contacted financial planner Lazetta Rainey Braxton to help her figure out how to get the most out of her current investments and income.
Amend her tax returns: One of the easiest ways to get Newkirk some extra money is to amend recent tax returns. Because of Newkirk’s low income, she qualifies for (but hasn’t taken) the retirement savings contributions credit, which gives retirement savers a credit of up to 50% of their contribution, depending on adjusted gross income, for a max of $2,000 each year. Amending past returns to take that credit—you’re allowed to amend up to three past years—would give Newkirk an extra few thousand to jumpstart her emergency savings fund. Braxton says ultimately she should aim to build up $12,000, to cover roughly six months worth of living expenses.
To help her amend the returns, Newkirk can take advantage of the IRS’s VITA program, which offers free tax guidance to those with incomes below $54,000.
Streamline her retirement portfolio: Newkirk’s current portfolio, held within her 401(k), is pretty well-diversified, with 70% equities and 30% bonds and cash holdings. This is typically a good mix for someone Newkirk’s age, but Braxton suggests a more aggressive approach because Newkirk’s retirement income stream will also include two large fixed-income sources: her pension and Social Security benefits.
Braxton recommends Newkirk move to an 80/20 split, with bonds accounting for 15% and cash only 5%. To achieve this, Newkirk will need to increase her bond index fund holdings and decrease her cash holdings.
Newkirk could also benefit from adjusting her equities. Braxton feels she is overinvested in small companies, and would like to see her increase her holdings of large company stock and international funds and add some midsize company investments.
Braxton also suggests that Newkirk choose lower-cost investments, opting for index versions of her funds and in some places scaling back the number of funds she holds. (She could achieve the same level of diversification with only six funds instead of her current mix of nine, Braxton points out.) One specific example: Newkirk is invested in both the NC International Fund, which has an expense ratio of 0.39%, and the NC International Index Fund, whose annual fees were just 0.09%. Simply consolidating that money in the index fund could save her 0.3% in unnecessary fees.
“The lower fees will ensure that Newkirk receives more of the money she’s earned from the investments,” says Braxton.
Plan for a long career: Given Newkirk’s limited retirement savings, Braxton recommends she plan to retire at age 67 to maximize her Social Security benefit, pension, and 401(k) contributions. At that age, Newkirk’s pension could pay out about $32,000 a year, Braxton estimates, if she continues working for the North Carolina state government and receives a (fairly conservative) 2% pay increase annually.
The last few years of work will be critical, Braxton points out: Because Newkirk will finish paying off her mortgage at age 63, she can then redirect those monthly payments, splitting them between her 401(k) and cash savings before she leaves the workforce.
Ask family for help: All of these adjustments will help Newkirk retire a bit more comfortably. But the plan falls short in one respect: Unless Newkirk bumps up her earnings by finding a higher-paying job or taking on a side gig, she won’t be able to set money aside for her daughter’s education.
“Nancy wants to save for her daughter’s college savings, but she currently doesn’t have the cash flow,” says Braxton. “She should ask her family to contribute to an educational savings account, like a 529, in lieu of material gifts for birthdays or Christmas.”
Newkirk took this news hard at first, but Braxton reminded her that her top priority should be to ensure that her own financial house is in order. “You can’t get a loan for retirement,” Braxton cautions. She also pointed out that one of the best gifts Newkirk can give her daughter is the knowledge that Nevaeh will not need to support her mother in her old age.
“Whenever she graduates, she will have a lot more time left to pay off that debt then I will to save for retirement,” admits Newkirk. “And if I can help her financially—if I get a better-paying job or promotion—then I’ll start the 529 savings for her.”
Newkirk has already made some small headway toward that goal. She recently took on a side gig teaching English online that allows her to set her own schedule. She plans to devote her early morning hours, while her daughter sleeps, and some weekend time to this, to earn enough to settle her car loan and build up her emergency savings.
And she has already set up a meeting with a tax advisor to review her returns. The portfolio adjustments are next. “It is such an easy change,” Newkirk says. “It will work better for me, and earn me as much as possible while I’m sleeping.”