Money for retirement

"I've Got Some Money Saved for Retirement: Now Where Do I Put It?"

By Tom Copeland, posted with permission

Most family child care providers are not comfortable with choosing investments for their retirement.

Unless you are spending a lot of time researching various investment options, it can be daunting to try and decide what to do with your money.

If you are someone who doesn't know much about investing, this article offers my simple explanation for what to do to get started. Later you can learn more and make changes to your investments.

When investing for retirement you want to minimize your risk and maximize your return. To do that you need to have a proper balance of two major kinds of investments - fixed income investments and equities.

Fixed income investments are like IOUs; they include bonds, money market funds and certificates of deposit(CDs). A company or government entity promises to pay you back your investment at a certain date in the future with a fixed rate of return. The interest you earn on these investments are relatively low, but they also have a relatively low risk.

Equities are investments in which you assume some ownership of an asset, such as a company in which you buy shares. These investments include stocks and real estate. Equities have a potential high return and a potential high risk.

You want some of each type of investment. You don't want to put all of your money into fixed income assets because your return will be too low to beat inflation.

You don't want to put all your money into equities because their value may decline abruptly just at the point when you want to start withdrawing money to live on.

So, what is the best mix of these two types of investments?

Here's two simple options:

Option #1

60% in the Vanguard Total Stock Market Index Investor Shares Fund

40% in the Vanguard Total Bond Market Index Investor Shares Fund

Option #2

45% in the Vanguard Total Stock Market Index Investor Shares Fund

25% in the Vanguard Total Bond Market Index Investor Shares Fund

10% in the Vanguard REIT Index Investor Shares Fund

20% in the Vanguard Total International Stock Index Fund

Here's why I selected these options: To get the broadest possible exposure to the stock market, invest in a total stock market fund that invests in a representitive sample of all companies. You are spreading the risk of equities by buying into the entire stock market.

To get the broadest possible exposure to bonds, invest in a total bond market fund that buys the various types of bonds (short term, long term).

Invest in index funds because these have the lowest management fees. The most important factor that will determine the performance of a fund is the annual costs of the fund, according to a 2004 study by Standard & Poor's, an investment research and rating firm. Since then the basic conclusions of this study have not been challenged.

Your choice about how much of your money to put into fixed income and equities can be influenced by your age, your willingness to take risks, your health, and other personal circumstances. My suggestions above are a starting point.

See my article "Where Should I Invest My Money For Retirement?" for a detailed discussion of where to invest and why you should invest in index funds.

Note: I chose to use the Vanguard company in my options because they are the biggest investiment company that offer the most choices for index funds. Here are three other companies that offer many index funds. I've listed the names of their funds that are the same as Option #1:

Fidelity: Spartan Total Market Index Fund and Fidelity U.S. Bond Market Index

Charles Schwab: Schwab Total Stock Market Index and Schwab Total Bond Market Fund

T. Rowe Price: Total Equity Market Index and U.S. Bond Index

Summary

Don't know much about investing? Choose Option #1.

If you are a little more knowledgeable about investing and want to diversify more, choose Option #2.

Caution: Don't invest in something if you don't understand it. My Option #1 is very basic, but if you don't understand it, don't do it. Begin to educate yourself about investing for retirement so you can make informed decisions later.

Tom Copeland - www.tomcopelandblog.com 

Image credit: www.quizzle.com

For more information about investing, see my book Family Child Care Money Management and Retirement Guide.

Ready for your retirement?

Retirement Quiz

By Tom Copeland. Posted with permission

Most family child care providers, like most taxpayers, are not saving enough for their retirement.

Many do not have a good understanding of how to plan for their retirement. 

 

Test your retirement knowledge by taking this short quiz.

 

1) Social Security payments will replace approximately what percentage of the current earnings of the average taxpayer?

a. 20% b. 40% c. 60% d. 70%

 

2) If a provider's only work was doing child care for fifteen years and she had a profit over $400 for nine of those fifteen years, would she qualify to receive Social Security benefits?

a. Yes b. No

 

3) You can start receiving Social Security retirement benefits at age 62. If you do so you will receive lower benefits than if you waited until your full retirement age of 65, 66, or 67 depending on when you were born. Under what circumstances might you take benefits starting at age 62?

a. Current bad health b. Immediate financial stress c. History of early death in your family d. All of the above

 

4) If you aren't saving enough now to be able to retire at age 66/67 what can you do?

a. Work beyond age 66/67 b. Save more now c. Live on less in retirement d. All of the above

 

5) If you save $35 a week and earn 8% a year in a tax deferred IRA, how much will you have in twenty years?

a. $10,232 b. $15,741 c. $25,655 d. $37,143

 

6) Can a single provider making a profit of $75,000 invest in both a SIMPLE IRS and a Roth IRA each year?

a. Yes b. No

 

7) If you invest in an index fund you are adopting what type of an investment strategy?

a. Passive b. Active

 

Answers:

 

1) 40%. Of course the answer for you may be different. To find out how much Social Security benefits you will receive when you retire, go to www.socialsecurity.gov and check out their benefits calculator. Because Social Security benefits will not replace all of the money you will need for retirement, you need to identify other sources of retirement income: income from your investments, earned income in retirement, other.

2) No. You must work at least ten years to qualify to reecive Social Security benefits.

3) D. For each year you take Social Security benefits before your full retirement age of 65, 66 or 67, you benefits will decrease. For example, if you start claiming benefits at age 62, they will be about 25% less than if you waited until you were age 63. Therefore, before deciding on when to start taking Social Security benefits you should consult with your local Social Security office or with a financial advisor who can advise you.

4) D. Most providers will not have saved enough to be able to maintain their current standard of living by relying on Social Security and the interest on their investments. Therefore, all of these options are viable. Other possibilities can include: move to a less expensive home, receive an inheritance or change your job to one that pays more.

5) C. $25,655 Even a small amount of money can quickly grow over time. This means it is never too late to start saving money now for your retirement.

6) A. All providers are eligible to set up and contribute to a SIMPLE IRA
 (regardless of your income). You can set aside up to $12,000 of your profit into this tax-deferred IRA (2013 limits). You can contribute an extra $2,500 if you are age 50 or older. The deadline for establishing a SIMPLE IRA is September 30th. Single providers are eligible to contribute to a Roth IRA if their profit is less than $112,000; married providers can contribute if their family's adjusted gross income is less than $173,000. You can contribute a maximum of $5,500 per person to a Roth IRA in 2013. If you are age 50 or older you can contribute an extra $1,000. You can set up and contribute to a Roth IRA before April 15.

7) A. Index investing means you are investing in a fund that identifies specific investments and then holds onto them indefinitely. For example, an S&P Index Fund invests and holds onto the 500 largest U.S. companies that comprise the S&P 500. Active investing is when the manager of a fund buys and sells various investments throughout the year. For example, the XYZ Fund might consist of investments in thirty different companies at the start of the year, but the manager could buy stock in ten other companies duriretirementng the year and sell the investments of seven other companies. A passive investing strategy will result in lower management fees because of lower transaction costs and taxes. Therefore, most index funds will beat the returns of active managed funds over time.

Score yourself!
0 correct - Time to start paying attention to your retirement planning!
1 - 3 correct - Good start!
4- 6 correct - Excellect!
7 correct - You are a master!
 

Image credit: www.ifa-fiv.org

For more information see my book Family Child Care Money Management and Retirement Guide

www.tomcopelandblog.com