Help me, Help Mom

[sillyarms]

My mother is not very good with money. She is 52 years old and plans to retire in 12-15 years. She has 15k in savings in a metlife mutual fund. Besides retirement this is the extent of her savings. She has retirement from her current job. I am unsure how much this is going to be but she has worked as a teacher for the state of Kansas for the last 15 or so years. She is willing to set aside $200 per month. She is also uneducated about investing. In asking her about her situation I somehow volunteered my help. So she has $200 a month that can be invested. This amount will probably be increased with time.

Things that are important(in no particular order).

1) Easy, She does not understand investing principals. I plan to attempt to educate her but I'm not sure how that will work out or how long it will take.

2) It would be best if money could be automatically deducted. She has expressed her concerns that she will not invest her money as she should. She thinks she may either get lazy and not deposit her savings or spend it on other things.

3) Cheap. She should not be spending money on loaded mutual funds, or funds with high fees. This just strikes me as a bad bet. The mutual fund she currently is investing in is loaded.

I have already come to my own conclusions about how she should go about saving as much as she can for retirement. But being my own mother this is important to me. So I am asking the opinion of others to see if they are close to my own.

How should she best save for her retirement?
Should she be looking at an IRA?
Should she be looking at an Roth IRA?
Should she be looking at a mutual fund(If so which ones)?
Should she be looking at an index fund(If so which ones)?
Should she be looking at an EFT(If so which ones)?
What books or Internet resources should I point her to in order to educate her?

I realize my question is very broad but I need all the help I can get. Thank you.

[DesertCat]

My advice is to put the $2400 into a Roth IRA, and invest it in an index fund. I would open the Roth IRA at Vanguard. I say this not as an expert on specific index funds, but just that my guess is that Vanguard is as good as any low cost fund provider, and if it's worse, it's not likely worse by much.


They have a "target retirement fund 2020" for people retiring between 2018 and 2022. This fund has a very low expense ratios, and automatically shifts the portfolio into more bonds as your mom gets closer to retirement, so she has to do nothing but put her money in every month. And I would bet Vanguard has an automated payroll or checking account deduction system if you snoop around on vanguard.com.

For a book, you might get her one of John Bogles (the vanguard founer) books on mutual fund investing, I haven't read them but they are highly recommended by most and they probably explain the benefits of index funds and allocation changes pretty clearly.

[BigBiceps]

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My mother is not very good with money. She is 52 years old and plans to retire in 12-15 years. She has 15k in savings in a metlife mutual fund. Besides retirement this is the extent of her savings.

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My advice would be to revise the plan of retiring in 12-15 years, it does not seem realistic at that income level, savings level and timeframe, to live a nice retirement.

[leto333]

This is somewhat offtopic but I will throw it out here to see if it is relevant.

Has your mother considered long term care insurance. My Mom purchased it a few years ago and apparently it gets exponentially more expensive the older you get and it is relatively cheap if you get it before age 55 i think.

This is all third hand knowledge so perhaps someone more knowledgable could comment on the validity of those statements.

[Baulucky]

She's doomed and will likely depend on your charity. Start planning your future accordingly.

Sorry for the blunt answer. The numbers just don't make it.

[DesertCat]

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She's doomed and will likely depend on your charity. Start planning your future accordingly.

Sorry for the blunt answer. The numbers just don't make it.

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This may be true but before jumping to conclusions we are missing some information.

1) Does she own a house? If so, how much equity will she have in 15 years? That's where a lot of retirement savings is hidden in this country.

2) How much will her pension pay? State pensions can be very lucrative. Combine this with social security and she might not need any other savings if she doesn't spend too much.

Lastly, you should check into long term care insurance. One thing to be aware of is the rating of the company that's providing the insurance. My mom bought some cheap insurance from a company that looked on the brink of being insolvant. You want AAA ratings since she won't know if she needs it for anywhere from 25-30 years.

Lastly, don't overinsure. If between SS, the pension, her home equity, and her Roth IRA she can expect $30k per year in income, just get enough insurance to cover any costs in excess of that.

[RedJoker]

I turned 20 on Wednesday and obviously have not considered retirement properly but would like to help and have a suggestion.

Have you considered investing in dividend paying stocks (or dividend index funds), up until retirement the dividends can be re-invested. After retirement, if the dividends are large enough it may be possible to live off them.

If you have an average knowledge of trading you could also sell out of the money covered calls on a monthly or bi-monthly basis and re-invest those returns.

Here's a few potentials:

Company - Ticker - Yield

PepsiCo - (NYSE: PEP) - 2%
Chevron - (NYSE: CVX) - 3.5%
Pfizer - (NYSE: PFE)- 4.0%
Citigroup - (NYSE: C) - 4.0%
General Electric - (NYSE: GE) - 2.9%
Abbott Labs - (NYSE: ABT) - 2.8%

These figure's were taken from a Motley Fool newsletter, it may be worth subscribing to their retirement newsletter (or something similar) to get professional advice.

[DesertCat]

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If you have an average knowledge of trading you could also sell out of the money covered calls on a monthly or bi-monthly basis and re-invest those returns.



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I would be very wary of covered calls. Mom needs the highest possible long term returns for the equity portion of her portfolio. Covered calls can reduce those returns. A covered call is allowing someone to pay you a small "premium" for the right to buy your stock if it goes up to the call price. It sounds like free money but the problem is that stocks don't move up on a steady basis. Often they jump up in a very short period, and by selling a covered call you gave away part of your gains in return for very tiny monthly premiums.

And if you are in a taxable account, and are forced to re-enter your position every time it gets called, you lose a ton of tax advantages. Since every call of a profitable position is a taxable event, you will have to pay taxes on your profits now, instead of deferring them years. And you will be much more likely to pay short term capital gains rates, instead of much cheaper long term rates.

There is no free lunch, and covered calls are rarely a good idea.

[RedJoker]

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It sounds like free money but the problem is that stocks don't move up on a steady basis. Often they jump up in a very short period

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These jumps or 'gaps' are rare and are the exception rather than the rule. By avoiding selling covered calls over earnings dates these gaps can be further reduced.

By selling covered calls you gaurantee steady cash returns rather than capital gains, which can't be cashed out unless you're actively trading waves or rolls.

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by selling a covered call you gave away part of your gains in return for very tiny monthly premiums.

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These premiums can range anywhere from 2% to 10% per month, compounded this makes for not so tiny annual returns.

I live in Ireland and have no knowledge of American tax rules, therefore I'm not qualified to give advice and readily accept DesertCat's opinions.

Covered calls work for me but they may not work for someone else. There are as many ways to trade as there are traders. If tax regulations make trading covered calls unprofitable don't use them.