The saving secret for women? Start young

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the continuing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

I learned a couple of things as I was helping three young members of the Women in Red -- Lyndsey, Stephanie and Jill -- figure out their retirement plans.

First, I realized that my own retirement plan would be in a lot better shape if I'd started saving in my late 20s or even early 30s. And second, that although it pays to get an early start, there are still some traps to avoid.

• Temptation: In her experience, says Dee Lee, a financial planner and author of "Women and Money: Your Personal Finance Guide" and "Work Less, Live More: The New Way to Retire Early," young women are more likely than men to tap their retirement funds for major life changes, like buying a home or decorating the baby's room. "Men don't do that," she says.

• Sporadic savings: Women have more of a tendency to cycle in and out of the workplace, which can stall their savings progress.

• Longer life expectancies: Women in their 20s today may be looking at life expectancies close to 100.

All of which makes it essential that these three save as much for retirement as they can -- ratcheting up to 15% of their gross income, Dee recommends -- while also funding both short- and long-term savings to ease the temptation to raid the piggybank.

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Lyndsey: The reluctant saver

Although she doubled her 401(k) contribution from 2% to 4%, would it kill her to throw in the last 2% to get the full match her company offers?

You might think so, the way she's been dragging her heels. Sharon Rich, a financial planner and founder of Womoney, a financial-education Web site for women, thinks Lyndsey's investment portfolio could use some tweaking, but that her main hurdle is saving more.

* Based on 4% annual drawdown and not including Social Security.

Lyndsey is on track to have saved about $575,000 by the time she's 70, which would give her an income stream of about $23,000 a year in today's dollars, not including Social Security, if she lives to age 100.

If she ramps up her savings to 15% in the coming year or two, and her income rises by 10% (another benefit of being young is that your paycheck is likely to grow), Lyndsey could save about $1.1 million, which would yield a more ample $44,000 annually.

"She really needs to get that full match -- it's free money," Rich points out. "And she needs to think about contributing 15%. Otherwise she's going to cause herself to have to work a lot longer and with a restricted quality of life."

The debt issue

I told Rich that Lyndsey is well aware that her spending habits have gotten her into this hole, but she keeps using her credit cards anyway. Rich, sounding stern, then said that Lyndsey might need to use the dreaded Envelope System. Here's how it works:

• You track your income and expenses, using a spreadsheet or notebook or (hello, people!) financial software.

• You set aside money for retirement, long-term savings and debt payments.

• The rest you distribute as cash into little envelopes for lunch, dining out, entertainment, etc.

"If the money is there, she can spend it," says Rich. "When it's gone, it's gone. It's called the no-brainer approach."

Once the debt is paid off, Rich wouldn't use that cash to supplement the 401(k). She'd have Lyndsey start a serious savings account for the expenses she will soon want to cover: a down payment on a home, a car, etc.

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Investment strategy

Her main criticism was being invested in the Fidelity Freedom 2040 (FFFFX, news, msgs) fund (which is a popular one with this group, and, no, we are not sponsored by Fidelity) and in the Dodge & Cox Stock (DODGX, news, msgs) large-cap value fund, which gave her too much exposure to giant-company stocks.

To give Lyndsey more mid-cap exposure, Rich recommends putting $2,500 into the Marsico 21st Century (MXXIX, news, msgs). "She should be able to buy that through Fidelity without a transaction fee."

Jill: High earnings, no savings

Although she earns about $90,000 and has a net worth of more than a quarter-million dollars, her retirement saving has ground almost to a halt in recent years.

Only because I stood outside her window at night, playing her old E.F. Hutton commercials about financial security, did she finally throw a paltry $3,000 into her IRA by the deadline.

That wasn't the maximum she could have contributed. But, she says, "that was all the cash I had."

* Based on 4% annual drawdown and not including Social Security or home equity.

Needless to say, yours truly -- who didn't start saving for retirement until two minutes ago -- can hardly throw stones at Jill's contributions.

But it is, well, odd that someone with zero debt and such an ample salary -- even for a New Yorker -- wouldn't set aside money on a regular basis and save the maximum allowable amount.

Continued: No financial-apathy disease

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