Annuities/Best way for lower-income single moms to invest

[kasey00]

Good afternoon! I am new to this site and this forum, and I am also very new to investing. I've been doing it when I can, but I know very little about it. I've been starting to read articles both online and in this forum. I'm starting to find articles saying that annuities really aren't "all that", and to go with a Roth IRA instead. My mother is sold on annuities, but I don't mind exploring other options for retirement.

Having said that, I'm a single mom who finally got back to working full-time, though still not in the highest income job. Now that I'm eligible for 401k contributions again, what is the best way for me to invest? I can't count on child support and I do own a home I'm still paying for, though thankfully up until my car recently died, that's really the only debt I have. I want to be able to save for the future, but to also have an emergency fund - I panic at the thought of my furnace going out or roof needing replaced! I also need to replace windows in the house eventually (the sooner the better, though considering, they still seem efficient!) What would my best option be, in a language I might understand?

[mskyle]

Sounds like for a first step you need an emergency fund that will cover 3-6 months of expenses (I only keep 2-3 months myself, but I rent, I have no kids, I have another earner in the family, and I have more than a year's worth of expenses in more volatile investments). You should then start saving for likely home repairs - they don't have to be emergencies! They can just be unpleasant expenditures. So ideally you should have 3-6 months worth of expenses plus, say, the cost of a new roof and/or furnace if yours are reaching the end of their useful lives.

Keep that money someplace low-risk, like a regular old vanilla savings account or a CD. I know! It's super boring. But having an emergency fund puts you in a position of strength where something like a roof repair or emergency dental surgery doesn't interrupt your financial progress. And you won't have to panic at the thought of your furnace going (it would still suck, obviously, but it wouldn't be a crisis).

As for retirement investing, stay away from annuities is my advice. Annuities are generally very low-risk and very low-yield, and the people who sell them generally get huge commissions for selling them (which comes out of your pocket). They're also usually hard to get out of.

What I would recommend for you is if your 401k has something like a "target" or "lifecycle" fund with not-too-high fees, invest in that. These are really easy investments for beginners. They're diversified investments right out of the box. Most IRA providers (Fidelity and Vanguard are good choices) also have these types of funds.

[Bicycle_B]

Keep reading and learning, and congratulations on the start you have made in your new life.

I agree that savings are very powerful, and enough savings to handle "emergencies" should probably be done first.  (Like MsKyle says, once you have the savings, they're not emergencies any more!)

There is one other key thing, though.  Does your employer offer a matching payment for your 401k?  Many employers do.  It can help a lot; it's guaranteed extra money back on your investment.  If they have a matching payment, you should probably start taking advantage of it as soon as possible after you have some emergency savings.

True story: My employer back in the 90s had a matching payment of 50% on the 401k, where you could invest up to 12% of your paycheck and they would add in half of whatever you invested.  I was making about $2,000/month, so I put in about $240/mo for five years.  Their share added $6000 in free money for me.  That investment grew to about $45,000.  That was after they mismanaged their own fund and lost half the money - it should really be about $90,000 now.  That's a lot of return on a couple hundred bucks a month.  A lot of it was from the matching payment.  Very powerful.

One thing to look out for on 401k matching, though.  The match often has rules to it that you should learn.  For example, in my old employer's plan, you did not "vest" in the plan (meaning, actually get to keep the matching payments) until you worked there for five years.  If you left early, you only got to keep part of it.  It's usually still worthwhile, but learn the rules of your company's plan.

[arebelspy]

Annuities are just about the worst investment you can make.  There are a lot of annuity salesmen out there to convince you otherwise, and the reason why is because it makes them (and their companies) lots and lots of money.

Start with the emergency fund, and in the meantime reasearch and post what investment options are available in your 401k (and most importantly, what the expense ratios on each of them are), and we can help guide you.

JLCollins' The Simple Path to Wealth book is a very straightforward introduction to investing.  You can get the bulk of it free on his blog at http://jlcollinsnh.com/stock-series, but the book packages it together well.

Good luck!  We're here and can answer questions, so don't hesitate or be afraid to ask, at all!  No dumb questions, we all started where you are.  :)

[kasey00]

Thank you so much for all of the quick responses! I'm glad to know that what I've been reading seems to be consistent with reality - sometimes it's hard to tell, especially for someone like me who isn't well-versed in investing! I've contributed to a 401k any time it was available through an employer, but never really knew what I was doing, other than trying to put in the maximum that the company would match. Definitely need to put my little bit of money to work better than I used to! I'm also glad to know that Vanguard is a reliable company to work with - my investments have been with them for years, and any time an employer had an outside one, I rolled it over when I left the company to Vanguard with my others. I've had to dip into it a couple times and I don't like doing that, so I'd rather have accessible savings for those surprise repairs, and still have my retirement on good footing!

[arebelspy]

Awesome that you ended up in Vanguard and not something like Edward Jones. Many aren't so lucky. 

Stick around, keep reading and learning, and you'll pick up what you need!  :)

[La Bibliotecaria Feroz]

I sometimes read Michelle Singletary's Washington Post column and one thing she talks about is having a "life happens" fund. Yes, you should have a large emergency fund in case you lose your job. But start with maybe a thousand dollars in an online savings account. Enough to cover one major repair of some kind. Then once that's in place, you could work on building, separately, the "big" emergency fund and simultaneously funding your 401(k) to some extent. Then you can work on multiple savings goals but know that you won't have to raid your retirement for a broken furnace.

[LeRainDrop]

All of the prior advice is great, and I really want to emphasize agreement with this part:

Annuities are just about the worst investment you can make.  There are a lot of annuity salesmen out there to convince you otherwise, and the reason why is because it makes them (and their companies) lots and lots of money.

Both of my (divorced) parents got sold on compiling all their retirement savings into a single annuity, and it makes me so mad at their "financial advisor" because neither parent was a good candidate for an annuity, plus the product has high fees, which I can tell from reading the prospectus, even though both my parents naively think that there are no fees and that the advisor is not making money off of them.  It's been an especially bad decision for my dad to buy the annuity because he was laid off a couple years before he had planned to retire, had a series of challenges in his life that meant he has not gone back to work in the last few years, and now he is totally scraping the bottom of the barrel each month to cover his expenses.  He's in a bind because he has a large amount of money in this annuity, but he depends on the monthly income from it, and if he were to take any amount out of the principal of the annuity, then the "guaranteed" rate of return would go down significantly, plus all sorts of fees and complications.  It really sucks that he has a lot of funds saved but essentially can't/won't access them when he really needs them.