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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.

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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

More Money Matters columns
See Also
Investing strategies 101
10 basic mutual fund terms
Loads, fees and mutual funds
Money Matters archive

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