Good saver faces dilemma

The Baltimore Sun

Like many thirtysomethings, Sarah Francis is hearing the call of homeownership.

With a recent price softening in some markets, the 32-year-old Chicagoan thinks it may be a great time to jump into a condo.

She worries about borrowing - she has no credit-card or student-loan debt - and she's managed to accumulate about $40,000 in cash from her income as a nurse practitioner over the past several years, saving money by renting a room at a friend's house. She's also socked away almost $68,000 for retirement.

And buying a home seems like a popular move for people in their 30s: More than half (56 percent) of people 30 to 34 were homeowners in 2006, a big increase from the rate of 42 percent among people in their late 20s, U.S. Census Bureau figures show.

"I want to buy a home and will need to buy a car," Francis wrote in a letter to Your Money requesting a Money Makeover. "And I want to continue saving for retirement."

It's a common dilemma for first-time homebuyers: Being able to save and pay for the home without sacrificing vital retirement savings. So, can this disciplined saver have her new home - and still have something left to eat, too?

The answer is yes, but not right away, said Karen Altfest, a veteran financial planner who agreed to help Francis make some key money decisions for the future. Altfest is vice president of L.J. Altfest & Co., Inc. in New York, president of the New York chapter of the Financial Planning Association and a frequent speaker on the topic of women and money.

"Sarah has really good habits and is way ahead of most of her peers," Altfest said. "She's in a good position to achieve her goals, with no debt and a good savings rate."

Based on projections for 2007 income of about $86,000 from two nurse practitioner jobs, Francis is on track to save more than $28,000 this year, including about $10,000 for retirement, Altfest said.

But Francis would like to put 20 percent down on a new home - she's looking in the $200,000 to $250,000 range - and she'll likely need to show a lender she has three months of mortgage payments in the bank, Altfest said.

Add in the associated moving costs and you have a case for waiting about 18 months to stash away more savings before buying the home, Altfest said.

The planner also recommended delaying the purchase of a new car until 2009, even though Francis wanted to replace her 2001 Honda Accord a little sooner.

Even by waiting, Francis still may have to take out a car loan, Altfest said, a move she is resisting.

"I'd rather just keep this car longer," she said, adding that she doesn't want to get back into debt, as she was during college. "I was in over my head as a college student until my brother sat me down and told me I was living way above my means. Since then I've become more aware of where my money's going."

Altfest hopes that attitude prevails once Francis starts shopping seriously for a home. Many clients start looking and quickly ramp up what they're willing to pay, the planner said. And Francis' price range already represents almost three years of gross income, where advisers traditionally like to see costs more in the range of two years' gross income.

And while Altfest did discover Francis is spending a bit more than she realized, her spending today is well under control, at $57,758 including all taxes.

"Her spending is not unreasonable. She's saving a lot, working hard and is entitled to go out to dinner and a movie now and then. But it was a good reality check to see exactly how much she's spending," said Altfest.

Once the home purchase is made, the planner urged Francis to max out her 401(k) plan at work, putting away roughly $15,000 a year. That would be an increase from the close to 9 percent she's putting away currently from her main nursing job (she also has a part-time job) into the plan. She also is financing a Roth individual retirement account.

The home purchase may also mean enough in the way of mortgage interest deductions that Francis could adjust her withholding for taxes at work to boost take-home pay, she said.

But how will she pay for all of this? There's no question Francis' cash flow will take a hit by buying the home. Altfest figures her cash flow will be a negative $16,028 in 2008 because of the home purchase. It should turn positive again in 2009 with a raise at work and with the home closing behind her, but her surplus will only be $9,564, not the over $28,000 she'll enjoy this year.

That will leave her nearly $2,000 short of reaching her retirement savings goal, and it leaves nothing for day-to-day savings.

That low savings rate will take some getting used to for Francis, but she's confident the home purchase will be a positive financial move in the long run.

In addition, the planner also recommended dampening the risk in Francis' portfolio, which currently has a large allocation to foreign stocks - nearly 40 percent - and a negligible position in bonds.

Altfest still recommends an aggressive portfolio given Francis' investment time horizon, but suggested cutting back to roughly 75 percent equities and 25 percent bonds, reflecting her answers to Altfest's risk-tolerance questions.

So her $67,651 in retirement dollars would be split:

Bonds: $17,000 in an investment-grade bond index fund and in an all-asset fund that incorporates bonds, commodities, real estate and other investments geared toward non-correlation with stocks.

Stocks: $50,651 in equity mutual funds.

Among the stock funds are investments in large U.S. growth-oriented companies (roughly 14 percent of the entire portfolio); a blend of large-growth and value-oriented companies (about 14 percent); mid-cap growth (13 percent); global value stocks (13 percent); mid-cap value (12 percent); and large foreign value stocks (7 percent).

"You should review this once a year or so and see if any of these asset classes have grown out of kilter," Altfest said.

For now, Altfest steered clear of purely small-cap and real estate funds - areas that have rallied and may be due for a correction - but those can be added later as the portfolio builds.

Finally, Altfest urged Francis to get some professional help to draw up estate-planning documents. Even though she has no dependents, she does have a sizable portfolio and soon will own property, so she should get on the record how she would want that handled, the planner said.

"It's just good housekeeping," Altfest said.

Janet Kidd Stewart writes for Your Money.

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