Investments for my dad's retirement?

Question

I have educated myself with a lot of information on investing, retirement planning, and income growth since I've graduated from college and started working in the real world. I have conveyed this information to my dad and he seemed interested. He didn't have the luxury that I have in planning for his financial future because he was too busy working hard to raise and support the family. All he did was save money in a bank account and possibly opened a few CDS. He is currently 52 years and will be retiring around 60+. I would like to help him out by setting up a retirement account for him. I have considered a Traditional IRA and/or a Roth IRA, but I was wondering if there were any alternative options. Right now, I am strongly leaning towards an IRA and will need to determine the most conservative approach for him in terms of growth, risk, and his age. Any help or suggestion would be much appreciated?

Answer 1

If he has a 401k plan, you can't do an IRA. If he has nothing, you can. If he has a 401k, he can also do a Roth IRA if he is under the income limits. If you want to set one of these up, the best possible place would be with Vanguard. They have the lowest fees among any mutual fund. You can do something as simple as to pick a target retirement fund (in his case Target 2015 or 2020). Good job on helping him out.

Answer 2

There are some important things to remember about Traditional IRAs. You have to have earned income to contribute. The max contribution for a 52 year old is $5000 per year. If you make a withdrawal before you are 59.5 you'll be penalized by the IRS.

You can have an IRA if you have a 401k, but the tax deduction for the IRA will be reduced or eliminated.

Take your dad to an investment person at a bank or credit union. They usually don't charge a fee to help - they will charge a commission and possibly other fees, but they must disclose those to you up front - there's almost never a fee just to get advice from them.

You may also have your dad speak to an accountant and they know his tax situation and are a good source for suggestions.

This website has good info about IRAs: http://www.axaonline.com/rs/3p/sp/3005.html

Answer 3

Good question.. Too bad your dad hadn't started sooner to save for his golden years.. The problem with a ROTH IRA or a traditional IRA is that you contribute earned income.., and the contribution is capped (for 2006 at $4000, $5000 for participants over 50).. You don't say if your dad has a retirement plan at work (ie 401(k), 403 (b)), if he does he should max out his retirement plan. Employer sponsered plans usually have higher contribution limits then IRA's & Roths.. The investments that he should invest in (either plan) should be a good mix of bonds & stock funds for his age.. The closer to retirement the more he should be in bonds but a small percentage of his overall portfolio should always be in quality stocks, I would perfer stock funds for various reasons (stocks provide appreciation bonds provide income).. Also, don't overlook non qualified (outside IRA's & Defined contribution plans) investments to boost his retirement savings once all qualified plans are maxed out..

Answer 4

the biggest difficulty your mothers and dads could have after retirement, is how lots earnings will he get to outlive? appears like he did no longer have a 401K plan, or positioned little or no in it over the years. Will he have a pension from his corporation? Will his corporation furnish scientific wellbeing coverage after he retires? the only element certain is social risk-free practices at age sixty six that's complete retirement age for him, yet lots of the time, that may no longer adequate to outlive. via paying off the domicile, could decrease down a brilliant form of costs. yet whilst he would not get scientific wellbeing coverage via artwork, will basically have Medicare at age sixty 5 whilst he qualifies and with weight of three hundred, likely have wellbeing issues by way of his weight. existence coverage isn't the respond, yet he needs to talk to an authorized economic planner on his retirement and the thank you to devise for it. yet a sturdy planner will talk all thoughts and supply the terrific obtainable suggestion. you're observing what's going to take place whilst he dies, vs what's going to he do till now that to outlive. sturdy success

Answer 5

You might consider an annuity for your dad because of age. There are several type of annuities. You need to talk to a financial analyst for this and they should be able to explain each plan with you and determine the best plan for your dad.

Answer 6

First of all, good for you! I keep telling my son that when he wins the Nobel Prize he can contribute to my retirement, but considering he's ten, we have a ways to go yet. :-)

At 52, your dad should be working on balancing risk versus return, as you suggest. (I turn 51 in about three weeks, so I have thought about this a LOT.) Mutual funds are an easy turnkey way to do that, because they (well, the good ones, anyway) are managed to achieve as much positive growth while minimizing the risk. How do you know a good one? Look at its history -- yes, past performance is no guarantee of future performance, but it'll give you an idea of the fund manager's knowledge, attentiveness, and timing.

When you open his IRA, find out what the investment options are. Can he invest in any arbitrary stock, fund or bond, or does he have to take only the ones the company offers as part of their IRA package? (The second option simplifies things, but it can reduce the overall payoff if they don't have investments that are at least comparable to the Dow, the S&P, and other measures of financial growth.)

You might consider allocating his IRA to four kinds of investments:

1 - Large-cap funds, made up of stable, blue-chip companies. These funds tend to have comparatively little volatility, but then again they also have comparatively flat growth. Coca-Cola or GE aren't likely to get a LOT bigger than they are... but they aren't likely to get a lot smaller, either. One real bonus to these funds, though: they often pay dividends. Make sure to explain dividend reinvestment programs (DRIPs) to your dad -- basically, when the companies in the fund write checks to the shareholders, the FI that holds your investment can choose to take these checks in the form of additional stock. So rather than getting a check for $182 once a quarter, your dad will get an additional 3.6 shares (or whatever) of his investment without having to buy them. You can expect as little as 6% return on some of these funds, but they have a VERY low risk.

2 - Mid-cap funds, made up of strong companies with a lot of potential upside, but with enough momentum that they're not likely to fold suddenly. You might see more mature technology companies here, and if you can find a fund with international holdings, that's another great hedge. Look for a mid-cap fund with returns at least in the 9-12% range. Yes, they return more, but because you're dealing with companies that are still coming up the growth curve, there's a risk they can fall.

3 - Small-cap funds. A small-cap company is the classic "Cisco IPO" company -- or at least that's what everybody hopes to find. These are relatively new companies with a LOT of potential growth, but also with a lot of potential risk. Even in the madness of the late 1990s, three out of every four startups failed. (What does that mean? Take four dollar bills out of your wallet and flush three of them down the toilet. THAT'S what that means.) Those that succeeded, like Google, have gone on to make a lot of money for a lot of investors. But the risk is much higher. Expect a fund like this to return at least what the S&P 500 does -- around 14-16%, but with a risk of LOSING that much, or even more.

4 - Bonds. Bonds were the smart thing to do in 2001-02, when the market was still crashing and burning and bonds were returning 6-8%. But since stocks have recovered (and the Fed has been playing with interest rates), bonds have dropped to 3% or less. However, most investment firms have some kind of "guaranteed not to go down" fund that is usually bond-backed. Your dad should put only a fraction of his money there now, but over the next ten years move more of it into that kind of fund to preserve capital for his retirement.

Only you and your dad can really make the decision, of course, but a good, safe approach that still allows him some room to grow in the next ten years might be to put 30% each in the large-cap and bond funds, and 20% each in mid-cap and small-caps. If he's more willing to risk a bit, he might try putting 30% in large-cap and mid-cap and 20% in the other two. Be sure he can move the allocations, though, as he will want to reduce his risk even further the closer he gets to retirement.

And finally... the only thing that's REALLY under any investor's control is how much he contributes. And I've come to the conclusion that the only way to make contributions is to have them come out before I see my check. I have my 401(k) contributions taken out every payday and I never see them (at least not till I log in to my 401(k)'s Web site), so I can't spend them and think "ah well, next time." (I STILL don't have an IRA because every year I think I'll have to set up a savings plan... ah well, next time. But I'm putting 10% of my gross pay into my 401(k) week after week, year after year. It's to the point where if I were to stop, I'd still have about enough money to retire on comfortably in 15 years, just by compounding the present balance.)

I've also recently started putting money into college funds for my kids, and once again I have the automatic deposit set up to put money into that account instead of my main checking account. Then I solve for bills, groceries, etc. with whatever's in my checking account, and I don't have to worry about running out of money for my daughter's tuition.

See if your dad can have his IRA contributions taken out of each paycheck. If not, he might look into something like this: I'm considering opening a "connected account" at my FI -- the basic idea is that you get fairly high return (over 5% yield now) with fairly low minimum investments ($1000, I believe) and you can connect the account to other financial institutions. I'll have my college-fund money deposted there automatically, earning 5%, but be able to take it out when the bills come due each quarter. That might be a way to help your dad earn a little bit now, but have big chunks of liquid savings to buy his IRA each year.

(Oh, and why don't I have a Coverdell for the college girl? Because she's 19... and I kept saying "yeah, I guess I should have one... ah well, next year." Right up till she was accepted.)

And of course, if your dad's employer offers a 401(k), that's the number-one thing he should do. You're never too old or young to have a 401(k) -- well, 70-1/2 is pushing it, but your dad still has ten years or so to contribute to one. The tax advantages are terrific -- they take pre-tax dollars and then reduce your taxable income by the difference, so every $100 you deposit only costs about $75 in take-home pay. And most employers do at least a partial match, so that $75 hit out of the paycheck might work out to $150 or even $200 in the bank if your dad's employer is generous. And it continues to appreciate tax-free for as long as it's in the 401(k) -- your dad will only be taxed on what he takes out of it after he reaches retirement age.

To get some ideas about what you can expect, and to motivate you and your dad to keep contributing, check out the compound interest calculator in the Sources field. I've used it several times to get an idea of what a change in my investments would make. And of course, there's a great retirement calculator built into Quicken -- yeah, I'm a member of that cult. Great stuff, though -- lets you play what-if with contributions, look at debt reduction, plan for major events like college (a big one for me, as I have one kid starting and two more coming after her...), and more.