Extreme financial makeover: Finding the right direction

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Kate, 32, is single and lives in Nashville, Tenn. Her current employer doesn’t offer a 401(k). She likes to travel. Kate wants to know whether she should buy a home, how to invest and how to move retirement savings from the pension fund of her previous employer to an individual retirement account (IRA).

Starting with her retirement fund: Because the previous employer’s pension program didn’t issue a check to her automatically—some do; others don’t—Kate has to open a rollover IRA.

The distribution check should be made out to her new custodian—a brokerage firm or her bank, for example—as “FBO [‘for the benefit of’ ] Kate McKenzie, Acct #XXXX,” advises Rob Jupille of RTJ Financial Management. “By not having the check made out to her directly, it won’t be considered an early distribution, so there won’t be taxes or penalties due,” he says.

A person who essentially is starting from scratch at age 32 to save for retirement should stash away about 20 percent of his/her income, says Joseph RR Templin of Unique Minds Consulting Group. However, Kate should consider contributing more, he says, because she desires to travel.

The additional expenses that homeowners incur, such as upgrades and maintenance, might offset any equity, warns Eric Ross of Sequoia Wealth Counsel. Templin, however, suggests that Kate buy a three-bedroom home and find a roommate to take care of her home while she travels and to boost her income through rent. Then Kate should use half of the rent money to fund a Roth IRA for retirement, he says, and place the other half into an emergency fund to cover an unexpected job loss. Kate could withdraw up to $10,000 from a Roth IRA for a down payment without penalty, because she’s a first-time homebuyer.

S. Berg