THE ADVICE
Black Enterprise offers a strategy to help move Smith forward.
Sell the condo. The biggest threat Smith faces is her student loan debt of $135,000, says Aaron Smith, CEO, financial coach, and founder of A.W. Smith Financial Group in Glen Allen, Virginia. She should sell her rental property and use the proceeds to pay off the student loans. “There is an urgency to pay off the loans because it could slow her process of reaching her other goals. It also represents more than 100% of her income and it is unsecured,†he adds. If she can’t sell for a reasonable price, she should consider moving back into the condo.
Keep funding retirement accounts. Based on Smith’s current savings and an 8% rate of return, she would need to invest approximately $33,000 per year to accomplish her financial goals. Since retirement accounts have contribution caps, we recommend that she continue to contribute to more than one type of retirement account. She currently has both a traditional 401(k) and a Roth 401(k) and two traditional IRAs. A traditional IRA is the right choice for her because, unlike a Roth IRA, it has no income restrictions (with a Roth IRA her salary would have disqualified her from contributing the maximum allowable amount). If she hasn’t already contributed the maximum $5,000 for 2009 she can do so through April 15. She should maximize her contributions for 2010 and going forward. In addition, she should streamline her accounts by downsizing to one IRA. Since the maximum contribution for 2010, no matter how many accounts one has, is $5,000, there would be no added benefit in having two accounts.
Ebony should also divide her 401(k) distributions among her traditional 401(k) and her existing Roth 401(k) for a 50/50 split. She would be able to contribute a maximum yearly contribution of $16,500. This would mean contributing $8,250 to each account. What’s the appeal of the Roth 401(k)? “Tax-free income at retirement,†says the financial coach. Since contributions are capped for each retirement account, maintaining the Roth 401(k) and the Continue the healthy savings habit. Since one of her goals is to have $1 million by age 40 and $5 million by 55, to get there she has to be aggressive with her savings. Smith should continue saving 25% of her income.
Explore entrepreneurial waters. Smith’s background of law and finance is ideal for what people are looking for in terms of someone who can help them with their money, says the financial coach. “Her skills are in demand. She has a platform and a process for a successful business,†he says. She should start now to work this venture into a viable business while she is employed full time. “The days of working for corporations for 30 years and getting your pension and going off into the sunset are in the past. We must diversify our skills and opportunities, just like we must diversify our investments,†he adds. Smith is working on her certification in financial planning, but has her licenses to sell investments and should begin to do so, along with her personal finance coaching. Having a business will also allow her to use her startup costs to reduce her taxes.
This article originally appeared in the March 2010 issue of Black Enterprise magazine.