Investing & Saving: An old man and his kid

[pidgeon]

He's not that old ;) my dad is only 61... I have a question pertaining to me and then one pertaining to him (spoiler-he has not a dime in savings).

I'm 28. I make 36k a year (but my take home is much less after taxes and healthcare). I have saved up 5K in a general chase savings account. It's an emergency fund- but besides another savings account with a better interest rate do you have any other suggestions for where to keep your emergency fund? I have also put about 5k in stocks via sharebuilder (mostly tech like apple, FB, Twitter, yahoo...)

I have the option of an IRA from my job. Besides minimizing your reportable income -- what else does an IRA do? Does it have interest? Also, in filling out my fidelity IRA paperwork, I got stuck at the question pertaining to what percentage I want to go into what stocks. There is about three pages of stocks and then there is 3 choices within each question-- any advice?

Lastly, I heard MMM and some others praise betterment. Do you think something like that would make sense for me? I looked at their website and it said I would be charged 35% of average annual balance. Does that mean they take 35% of my balance every year?!

Second Question: My father is 61, and doesn't have a retirement plan or any savings. He is wondering what is his best option to start saving today for his future. For instance, he said, if he was able to come upon 5k that he could place aside somewhere, what would be his best options considering his age? He is pretty much a self employed mechanic and auto wholesaler - so he doesn't have steady paycheck or a company sponsored 401k.

I told him needs to start saving a percentage of every sale he makes and put it away somewhere. I told him about betterment, and he's interested, but is there something better he could do? What would you recommend if this was your father?

Thank you so much!

Pidge

[MDM]

It's an emergency fund- but besides another savings account with a better interest rate do you have any other suggestions for where to keep your emergency fund?

No, for your situation "another savings account with a better interest rate" seems best.

I have also put about 5k in stocks via sharebuilder (mostly tech like apple, FB, Twitter, yahoo...)

Kudos for investing at all.  Concentrating in one sector of the economy can work well - but it can also work poorly.  For someone just starting, you could do a lot worse than Vanguard funds VTSMX or VTTSX (you can google those to find out more).

I have the option of an IRA from my job. Besides minimizing your reportable income -- what else does an IRA do? Does it have interest? Also, in filling out my fidelity IRA paperwork, I got stuck at the question pertaining to what percentage I want to go into what stocks. There is about three pages of stocks and then there is 3 choices within each question-- any advice?

You wrote IRA - did you mean 401k?  You have effectively infinite options for an IRA....  See http://www.bogleheads.org/wiki/Three-fund_portfolio#Other_than_Vanguard.2C_Boglehead-style for one suggestion of a portfolio in Fidelity.  If this is a 401k you may not have those specific options - need more info if that is the case.

Lastly, I heard you and some others praise betterment. Do you think something like that would make sense for me? I looked at their website and it said I would be charged 35% of average annual balance. Does that mean they take 35% of my balance every year?!

I suspect that is 0.35% - 100x lower.  You can find supporters and detractors of Betterment.  I'll abstain.

Second Question: My father is 61, and doesn't have a retirement plan or any savings. He is wondering what is his best option to start saving today for his future. For instance, he said, if he was able to come upon 5k that he could place aside somewhere, what would be his best options considering his age? He is pretty much a self employed mechanic and auto wholesaler - so he doesn't have steady paycheck or a company sponsored 401k.

I told him needs to start saving a percentage of every sale he makes and put it away somewhere. I told him about betterment, and he's interested, but is there something better he could do? What would you recommend if this was your father?

Any social security available?

I hesitate (and so should you) to give advice without knowing more about your dad's overall situation - social security is just one item.  He (or you and he, whatever works) should put together something that looks out 20-30 years with estimated expenses and known resources.  Then you can start to look at investment strategies to fill gaps.

[frugaldrummer]

As for where to put you money: emergency funds need to be easily accessible in an emergency. I'd have 3 mos living expenses in a savings account, another 3 months in a 3 month CD if you can get a better rate. You'll sleep better at night with 6 mos emergency expenses in savings.

As for the IRA ...if it's actually a 401k and if your employer contributes to it, contribute what you need to get the match. If it's an IRA I'd do a Roth IRA. No, you won't get a tax break now but in your income bracket that would be minimal. But you won't pay taxes on it when you withdraw it which could be a huge benefit for you down the line.

As for your dad....his budget is probably the first place to start. Can he reduce his expenses and increase his income to free up money to save? Since he's self-employed, has he been reporting all his income? (Many self employed people screw themselves over in Social security by under reporting. You might try a calculator to see what effect a few years of fully reporting his income will have on his benefit amount).

I congratulate you on thinking ahead and already having savings!

[pidgeon]

Hello everyone, thank you so much for responding. I looked into it, and I do indeed have the option of a simple IRA that I can put up to 12,000/yr before taxes and my employer will match 1%. I've never heard of this type of IRA and there is no mention whether it's Roth or traditional but I'm guessing since it says "before tax" that it is a Roth (or traditional?) type setup? Anyways, I make 36,000/yr so I can't afford to put 12,000 away (I at least don't think I can -- I will crunch some numbers and report back).

As for my father, you made an excellent point about social security and it reminded me that it's something I initially brought up to him when he called me. He told me that he doesn't believe he'll get any because one of his first major jobs working for the city was a pension job and he didn't pay into social security (and if you're wondering, that pension is long gone on a failed business ventur unfortunately). But you had a good question about whether he under reports or not at tax time as a self employed person. I will ask him.

Also, betterment got back to me. They said they charge .35% of the money they handle for you each year... So 3.50 per $1,000. Seems too good to be true?

[MDM]

pidgeon, good digging.  Now, your next reading assignments for the SIMPLE IRA:
http://www.irs.gov/Retirement-Plans/Plan-Sponsor/SIMPLE-IRA-Plan,
http://en.wikipedia.org/wiki/SIMPLE_IRA, and
http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SIMPLE-IRA-Plans

And an action assignment for Social Security:
Get with your dad and have him create an account at https://secure.ssa.gov/RIL/SiView.do.  That way you can see for sure what Uncle Sam thinks about your dad's SS past and future.

Regarding Betterment:  Yes,  0.35% isn't as bad as the 1%, 1.5%, etc. charged by some financial advisors.  Of course it's 0.35% more than 0% which is what it would cost to do something like this, or this, etc. yourself.  Betterment will, however, also do some rebalancing between funds for you.  Up to you....

Again, good work! :)

[pidgeon]

Thank you so much!! I will do my homework soon! Maybe while I'm at the dentist tomorrow. I will also do that with my dad very soon. I feel so lucky to have helpful people like you all!

[pidgeon]

Okay good news... I checked into the SS website for my dad and he qualifies for SS and medicare :) Estimate are between ~550/month - ~970/month depending on when he decides to retire. I'm so glad you told me about that website, and that he does qualify! I still haven't read up on the simple IRA yet, but I will soon.

Thanks!

[pidgeon]

I got some info about the Fidelity Simple IRA. I don't have the option of taxing the dollars now, but only the option of getting taxed when I take out. 10% tax penalty before a certain age...

"Taxes are due upon withdrawal. Withdrawals taken prior to age
59½ may be subject to a 10% tax penalty; for SIMPLE
IRAs, this penalty is increased to 25% if the distribution
is made during the two-year period beginning when
contributions are first made to the SIMPLE IRA. A plan of
systematic savings does not ensure a profit or prevent a
loss in a declining market."

I'm pretty sure I can put up to 12,000 in it/year. And my employer will match 1%. The thing I'm stuck on is I've heard it's better for someone younger like me to get the tax hit now, than later. And, I am signing up for betterment and they have an IRA option. Should I just use their IRA option and most likely lose the 1% match? For Fidelity's Simple IRA--it requires me to pick from a whole list of funds... most can be found here: https://advisor.fidelity.com/app/home and then I need to select a category of those funds (A, C or T) and then what percentage of each fund I want my IRA to be divided up into... That is another place I get stuck at. But from what I'm learning, I probably want to do a mix of domestic and emerging markets? I've attached an image of the first page of options... but most of the others I believe are on the link I posted a few sentences before...

*EDIT --- I just found this advice on the link you gave me in a bogglehead wiki. It suggested if not vanguard, to pick these:
Fidelity Spartan Total Market Index Fund (FSTMX)
Fidelity Spartan Global ex U.S. Index Fund (FSGDX)
Fidelity Spartan U. S. Bond Index Fund (FBIDX)

So, I'm guessing I would do -- 40% FSTMX, 40% FSGDX, and then 20% FBIDX (

**Ok, so I just tried to select those in the .pdf I have from Fidelity--and those options don't exist (or aren't written in the same way.) I guess I'll call them tomorrow...
Thank you!