No. 1: Late Start on Your Retirement Savings
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, September 2008
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Rebecca Edgar has lived through some tough times recently that have left her finances in shambles. When her former husband lost his job a few years ago, they decided to sell their home in San Jose and use the $150,000 profit for living expenses. Now the money is gone and so is Edgar's ex.
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A single mom with two young children at home and a son starting college, Edgar is starting over in San Diego. She receives no alimony or child support and has no savings. But she does have a plan, and she's pinning her hopes on a new business venture.
Edgar came up with the idea to publish a legal-information guide that's mailed to everyone who is arrested in San Diego and nearby counties. The guide is free, and it's a big hit with bail bondsmen and other local advertisers. Edgar expects profits of $15,000 per month.
What should she do with this infusion of cash? We asked William Jordan, president of Sentinel Capital Management, in Laguna Hills, Cal., to come up with a financial plan for Edgar. Jordan recommended that she focus on three goals: paying off the $40,000 in credit-card debt she ran up in business expenses, creating an emergency fund, and setting up a retirement plan for her business that will let her make up for lost time while reducing her tax bill.
As a self-employed business owner, Edgar can establish a solo 401(k) plan or a SEP IRA and shelter up to $46,000 from taxes this year. Jordan also suggested that Edgar use strategies for employing her children part-time as a way of lowering her business taxes and shifting income to the kids.
For example, Edgar could hire William, 10, and Kathleen, 8, to perform age-appropriate tasks, such as cleaning the office or emptying trash. They can each earn up to $5,450 -- the standard deduction for 2008 -- tax-free. Any money their mother pays in wages reduces her taxable profit.
The strategy is even more valuable for Edgar's son Christopher, 18, a college freshman. He could conceivably earn $10,000 to $20,000 and pay little or no taxes, thanks to the $5,450 standard deduction, and up to $2,000 in educational tax credits for qualified college expenses (for which his mother's higher income might make her ineligible).
Edgar can put the money she saves toward her other goals, which include buying a house in a few years and paying for her children's college education. "I am the queen of procrastination," she says, but Jordan has "forced me to set priorities."
If Edgar follows through and invests her savings appropriately, says Jordan, "she should be on track to retire with more than $4,000 per month in spendable income by age 60."
NEXT: LACK OF FOCUSED STRATEGY
SEE ALL NEST-EGG WOES
No. 1: Late Start on Saving
No. 2: Lack of Focused Strategy
No. 3: Big Nest-Egg Losses
No. 4: Little Savings for Retirement
NO. 5: Frozen Pension Funds
No. 6: Saving in a Bear Market
HOME: Catch Up on Your Retirement Savings
Reader Comments (7)
Posted by: Bill at 08/11/2008 03:53:58 PM
So, the solution to a late start in retirement savings is to start a business with $180,000 annual profit. Brilliant. Wish I had thought of that.
Posted by: Vaibhav at 08/11/2008 06:52:34 PM
I thought this article was meant for normal people earning wages! If you are earning $200,000 a year I don't think it takes a genius to plan for retirement even at that late age. Problem is for normal wage earning people. It would take a real Genius to help such people!
Posted by: Calene at 08/19/2008 03:30:35 PM
We see all these articles about savings but they are meant for people with high incomes, what about us that make $20,000-$40,000 a year or less, just trying to make ends meet and starting out late. You seem to forget about us, we can't play catch up!
Posted by: Really? at 08/20/2008 12:33:25 AM
So the solution is to get a job working for Edgar..?
Posted by: Nick Cooper (edgar) at 10/06/2008 02:11:39 PM
Just to let the community know, Rebecca is an extraordinary person who has worked normal jobs her entire life, just like you and me. The thing that sets her apart from the rest of the community of average joes is the drive that initiated her success. Up until the beggining of this year she was making no more money than the rest of us, however she decided to take hold of her life and create something much more meaningful. You can as well. and if anyone is wondering how i know this, my name is Nick Cooper and I am the eldest son of Rebecca and guess what.....i am a normal person working a less than meaningful job( while raising a 7 month old son, but i know that with time i will be successful because i have the same drive as my incredible mother.)
Posted by: Elena at 10/20/2008 11:54:16 AM
Hi Nick, I'm a single mom living in Chicago, and I love your mom's idea. I'd like to organize a similar business here, but there are so many questions! Is there any way to contact your mom through e-mail ot phone and get a few more details on how she is going to run this business? you can contact me at Zyamka19@gmail.com. Thanks a lot!
Posted by: j. Battle at 09/02/2009 06:52:10 PM
I am 58 years of age. what...do I do? I had to use most of the little money in my IRA when I was sick to pay bills. In 3 years or less I will retire...