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Helping mom get in the investing habit
Dear Money Matters,
My mother is almost 50 years old and has never saved a dime. She is paying on a $150,000 house and earns approximately $70,000 annually. Can you help point her in the right direction?
Jimi
Dear Jimi,
You're right to be concerned about your mom's financial
future.
Unfortunately, she's one of the millions of Americans
who have not set aside any money for retirement. And that is a recipe
for disaster.
Check out Bankrate's retirement
calculator to see what I mean.
I ran the following numbers. Based on your mom's current $70,000
income and an estimated retirement age of 65, she would need to
invest more than $1 million dollars -- today, no less -- to live
a comparable lifestyle when she hangs up her working duds (that
assumes an inflation rate of 3 percent, an annual return on investment
of 7.5 percent and that she will live to age 85). Granted, many
of us scale back our lifestyles after retiring -- by choice or necessity
-- but the numbers show that she had better get on the investing
stick and fast.
And that, in turn, likely means nowhere else but the
stock market. Admittedly, the market these days is not for the squeamish
but, from a historical perspective, there's no other investment
available that will even approach the kind of numbers your mother's
going to need to generate to retire. Even taking into account the
debacle that the market has endured lately, stocks have averaged
more than 10 percent in annual return since before the Great Depression.
Nothing else even comes close.
That said, I would also recommend that your mother
investigate mutual funds as a suitable stock market investment option.
Because she has not saved anything for retirement, I presume she
has no experience in stock market investing. If that's the case,
I would urge her to stay away from individual stocks, as researching
and picking winners is dicey enough even for weathered market professionals.
Instead, mutual funds allow her to invest in a basket
of stocks at the same time, all selected by a professional money
manager. The benefits are diversity, but also provides ongoing management.
As to what mutual funds she might want to choose, she can either
go it alone or hook up with a financial adviser, such as a certified
financial planner.
Again, based on what I can glean, it would probably
be wiser to find a competent adviser. You can either ask friends
and associates for recommendations or check out Web sites, such
as the Financial
Planning Association. Its search engine can hook you up with
a certified financial planner in your area.
I would also suspect that any planner worth his or
her salt will urge your mom to free up as much money as possible
and start saving aggressively. One area I would suggest she look
at first is her home -- with interest rates as low as they are these
days, I'm virtually certain she would be able to save money every
month by refinancing.
This
calculator shows how much she could save by refinancing.
She would also do well to examine her spending habits
in other areas, including utilities, food, entertainment and other
costs to see if it's possible to trim those back as well. Have her
track her spending for a month or two, then check where savings
might be possible.
As a final thought, she would also do well to look
into an automatic investment program. With this, rather than having
to write a check every month, she agrees with her bank and a mutual
fund family to have a certain amount withdrawn on a regular basis
and invested. That's a simple form of discipline. If this appeals,
however, make sure the money withdrawn is actually put into a mutual
fund -- with some plans, the money is placed in a money market fund
until a certain minimum amount is reached.
-- Posted: Aug. 13, 2002
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