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Money Makeover

Late start to retirement saving

Nearing 40 and newly married to Lisa Horvitz, Adam Rothberg was worried about his retirement savings. Nearing 40 and newly married to Lisa Horvitz, Adam Rothberg was worried about his retirement savings. (Wiqan Ang for The Boston Globe)
By Lynn Asinof
Globe Correspondent / April 19, 2009
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Adam Rothberg's first love has always been music. Playing gigs and writing songs, however, is a tough way to make a living. So Rothberg developed a second career as a freelance graphic designer in order to support his music career.

"My design work is constructed to pay for my music," said Rothberg, who has two regular clients and a variety of smaller jobs that help pay the bills.

Now that he's about to turn 40, the Cambridge resident has become increasingly aware of how little he has set aside for retirement. With just $2,700 tucked away in a retirement account, he feared it might simply be too late to start serious saving. So he applied for a Boston Globe Money Makeover, seeking professional help in figuring out how to shift gears to create a more secure future.

Rothberg celebrated two big events in 2008: He released a new CD, and he got married. Because Rothberg and his wife, Lisa Horvitz, keep their finances separate, the makeover with fee-only financial adviser Jeanne Gibson Sullivan of Back Bay Financial Group focused solely on his finances.

"If we had married at 25, it would have made a lot of sense just to merge," he explained. Dividing their expenses has worked well so far, he said, noting that he and his wife see no reason to change now.

Still, getting married focused Rothberg on family issues - funding his retirement, purchasing a new home, and perhaps even having children. The first item on the makeover agenda was retirement savings, which Sullivan said pose special problems for the self-employed. Since they have no company plan, self-employed people need to set up their own retirement accounts and then fund them every year without the benefit of matching contributions from an employer. That means in addition to picking the right investments, they must first select the right plan, she said.

Sullivan gave Rothberg a rundown of his options - a choice of three different retirement plans that include the SEP individual retirement account, the SIMPLE IRA, and the solo 401(k). All three take advantage of tax-deductible contributions based on earned income to build retirement savings, but only one was still an option for the 2008 tax year.

SIMPLEs must be set up by Oct. 1 of any given tax year and solo 401(k)s must be established before year end. That left the SEP, which can be set up and funded up until the date when tax returns are actually filed, including filing extensions.

Since SEP contributions are tax deductible, they can also significantly reduce people's taxes. Given Rothberg's estimated $40,000 of net income, Sullivan said that fully funding a SEP would allow the musician-designer to cut his taxable income by about $7,400. This would translate into tax savings of at least $1,100, possibly more if Rothberg and his wife file jointly.

Where would that contribution money come from? Because Rothberg lives frugally and diligently tracks his expenses, Sullivan quickly narrowed his options to two: He can either find additional work or reduce the amount spent on his music. Having just made a big investment in his work - the new CD titled "Another Spin" cost him about $10,000 - Sullivan said it might be time to allocate some of the resources previously spent on music to building up his retirement savings.

Rothberg said both options are possible. The singer-songwriter no longer needs to purchase new instruments, since his collection - which includes guitars, a mandolin, a keyboard, and a Turkish string instrument called an oud - is pretty complete. And he has the flexibility to take on another design client. "I could even see that happening in 2009," he said.

Sullivan said that initially Rothberg should consider putting his retirement assets into a target-date retirement fund such as the Fidelity Freedom 2035 or the Vanguard Target 2035. These funds offer a preset mix of investments that automatically become more conservative as retirement approaches. "They're easy," Sullivan said, noting that as Rothberg's retirement savings grow, he will probably want to create his own diversified portfolio.

Rothberg found Sullivan's advice empowering. "I'm really excited because it's not hopeless," he said. And he didn't flinch when Sullivan went on to recommend that he consider life insurance, disability insurance, and perhaps even a will.

Disability was high on Sullivan's list. "This is really important for self-employed people because you are dependent on your income," she said. For a monthly premium of between $1,300 and $1,800, Rothberg could buy a policy that would provide a $3,000 a month tax-free benefit should he become disabled, she said, noting that the rates would have been significantly higher if Rothberg had worked from home instead of a rented office.

Life insurance and estate planning were less pressing because the couple has kept their finances so separate. "But if you buy a house or have children, then it's different," Sullivan said.

ADAM ROTHBERG

Goal: Funding a comfortable retirement after a late start.

A freelance graphic designer and musician, Rothberg had done little to save for retirement. Having recently married, he wanted to redeploy a portion of his earnings - in the past used to support his music career - toward building a more secure future.

Recommendations : Open and fund a SEP IRA, starting with 2008 tax year.

Divert money used to support his music career toward retirement savings.

Take on extra clients if necessary.

Buy disability insurance now and consider life insurance in the future.