Did I give my mom good advice?

[mozar]

Hello and thank you for your help.

My mom recently inherited 200k. 100k is sitting in an inherited IRA and she has a minimum required distribution of 4k. The other 100k was liquidated and given to her (an inherited gift?). I don't really understand why it was liquidated but whatever. This amount is just sitting in a bank (ARGH!).

She is self employed and makes 24k a year. I told her to put the 100k that is in a bank and put it in index funds. Then each year withdraw 20k to live on. I also told her to take her entire income through out the year and put it in a self employment retirement fund. In 5 years she'll have spent the 100k but accumulated 120k in a retirement fund. Her age currently is 56. She can't reduce expenses because of her mortgage which will last another 20 years. There is not a cheaper place for her to move to, she won't take a roommate etc...What do you think?

[Chrissy]

More information would be helpful.  Does she have other retirement funds?  A pension?  Alimony?  What age do you/she hope she can retire?  Will she qualify for Social Security?

Yes to the self-employed retirement plan.  Yes to index funds.  Good job there.  I suggest a 30% bond/70% stock split.  Without more info, it sounds like she needs to work for another 15 years, so, in about 10 years, move to a 40/60 split, and when she retires, move to the 50/50 split.

I suggest a self-employed 401k and ROTH.  Talk to a professional, but using Fidelity's calculator, it looks like she can put $22,300/yr in a SE401k and $6,500/yr in a ROTH.  In 3.5 years, she'll have shoveled $100,000 into retirement accounts.

I'm not sure it makes sense to think of it as though she's living on the bank money, while banking her salary... but whatever works.

[mozar]

Thanks for your reply. She has no other retirements funds or pension. She didn't work much during her career so I imagine she will get around 1k a month ss. I'm pushing to take my dads social security at 65 (divorce benefit) and take her own at 70. Maybe retire at 70. She loves being a music teacher tho.
Why a roth? She's doing regular ira now. Can you link to the fidelity calculator.

[Gin1984]

I think the recommendation for the Roth is because your mom's income is so low.  I don't she is paying much in taxes, right?  I'd recommend the Roth too.

[mozar]

What does that mean tho? Because she is already not paying much in taxes she might as well go roth because its post tax funds? And 6500 is that with a catch up?

[AK]

How's your mom's health and family medical history? If she's healthy and no history of medical problems, I'd follow the other recommendations here too based on her longevity except with a 50% bonds and 50% stock asset allocation. I tend to be more conservative and think having less money in stocks is warranted despite another 20, 30 or more years of life expectancy.

[Gin1984]

What does that mean tho? Because she is already not paying much in taxes she might as well go roth because its post tax funds? And 6500 is that with a catch up?

Basically, yes.  The deduction may not matter to her much, because she is not paying much in taxes now.  You decide on the Roth vs Traditional based on your tax rate and what you think your tax rate will be in old age.  For your mom, it looks like she will not pay much either way, so might as well go with the one that you can put the most in (comparing $5000 pre-tax to $5000 post-tax, the $5000 post tax is worth more).  And yes, if she is over a certain age she can put in extra as a catch up.

[mozar]

What do you mean post tax is worth more? I thought pre tax was worth more?