Saving for Unemployment

An emergency fund is used to pay your living expenses during unemployment. It should hold 3-9 months of current earnings. Keep it for retirement.  

Protect Yourself

Unemployment means that you aren’t paid for doing work.  People who either lose their job or retire from work are unemployed. Could you pay for living expenses during unemployment?  If not, you should start building an Emergency Fund. There are two important savings plans during life: the Emergency Fund and Retirement Account (ref. 1).  

Emergency Fund  

The emergency fund is used to pay living expenses during temporary unemployment and other unusual expenses such as big bills.  Workers should save 3-9 months worth of earned income in a secure savings account (ref. 2).  That’s a difficult task when also planning to buy expensive items such as cars and houses, or paying-off college loans.  Get a headstart in childhood by slowly saving cash in a custodial bank account.    

Retirement Account 

The retirement account is needed to pay living expenses during permanent unemployment in old age.  Contribute to your own retirement accounts as soon and often as possible (ref. 3).  Begin by opening a Roth IRA during childhood when you start reporting earned income to the Internal Revenue Service (ref. 4).  Employer-sponsored and Self-employed retirement plans should be opened at the first opportunity (ref. 5).  

About forty to fifty years of regular investing are needed to build adequate savings for retirement (ref. 3). Plan on investing in quality securities such as stock index funds and government bonds (ref 1,6).  Begin with stock index funds early in life and add the bonds late in life, finishing with a 90% investment in stock funds and 10% investment in bonds (ref. 7).  

Retirement accounts have special rules for investing money (contributions) and removing money (withdrawals).  

  • Withdrawals before age 59½ years are generally not permitted without paying a fine and taxes [check the rules for exceptions in ref. 5].  There are no fines after age 59½ years. 
  • Roth IRA. You must pay taxes on all contributions and the contribution limits are $5,500 per year [check ref. 5 for changes].  Withdrawals after age 59½ are not taxed and there are no mandatory withdrawals. 
  • Other IRAs and retirement plans. The contribution limits vary from $5,500 to $19,000 depending on the account [check ref. 5 for changes].  You don’t pay taxes on any contribution, but withdrawals are always taxed.  The government requires partial withdrawals each year after age 70½ years. 

References

1. The Index Card.  Why Personal Finance Doesn’t Have to be Complicated.  Helaine Olen, Harold Pollack. Penguin Publishing, New York, 2013.

2. Emergency Fund Calculator, MoneyUnder30 . com:  https://www.moneyunder30.com/emergency-fund-calculator.

3. Retirement Income Calculator:  https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementIncomeCalc.jsf

4. Video on compound interest in a Roth IRA: https://youtu.be/6dzpNd3megg 

5. Retirement plans:  https://www.irs.gov/retirement-plans 

6. Saving and Investing for Students, SEC resources for youth:  https://www.investor.gov/search/node/students

7. Warren E. Buffett, Chairman of the Board. Letter to the shareholders of Berkshire Hathaway, Inc., 2013. Page 20, 2/28/2014.

Copyright © 2019 Douglas R. Knight

Delinquent investors

Children have the gift of time for building their future.  Unfortunately, thousands of young people waste their early opportunity to start building an emergency fund, saving for adulthood, and investing for retirement.  Here are 3 examples:

A neighbor who finished the first year of college with a 3-point average (good grades!) decided to move to New York to find a job and live with her sister.  This was not surprising when considering that she used to sell stuff door-to-door to earn money.  What surprised me was that she asked if we had any advice?  “Yes”, I said, “invest in a Roth IRA”.  “What’s a Roth IRA?”, she asked. Neither she nor her college-graduate parents knew about IRAs.

Two grandmothers told me on separate occasions that they wished their young adult grandsons would invest in the stock market.

References 1 & 2 describe the problem and correction for delinqent investing. 

References

  1. Tanisha A. Sykes, This 30-something investor isn’t freaking out about her 401(k) — she’s catching up, 7/5/2017, https://www.usatoday.com/story/money/2017/07/05/young-investors-late-bloomer/103394004/
  2. Wayne Pinsent, 5 common mistakes young investors make (updated 5/21/18): https://www.investopedia.com/articles/younginvestors/09/common-mistakes-young-investors.asp

Copyright © 2018 Douglas R. Knight 

Retirement savings

Retirement savings plans are increasingly used to supplement Social Security pensions. The 401(k) is the most common retirement savings plan offered by employers. What will happen to the future retirement income of young employees if their Social Security benefits are reduced or their employers suspend 401(k) matching contributions? The employee will then have to make up the savings deficit. It would help if they have their own long-term investing plan for retirement.

Imagine an investment in stocks that grows by multiples of 3, 30, and 90 times the original value during successive time periods of 18, 50 and 67 years. Helping a child make such an investment would help them retire in comfort IF that child learns how to manage the investment throughout adulthood. Homeschooling will help determine how well the youngster ultimately manages the investment.

Many of today’s retirees worry about a shortfall of lifetime savings. Children could avoid this future worry by starting a long-term investment in stocks that accumulates more than two million dollars.  Today’s formula is simple: Start early to make regular deposits in a Roth IRA that invests in a broad-market, stock-index fund. Then build the fund with payroll deductions.

Why aren’t there more millionaire retirees? Because of obstacles along the way; college, debt, taxes, and low income to name a few. Dedication and planning are needed to circumvent the obstacles. And here’s an idea for low income families: Help your child open a custodial savings account to accumulate sufficient funds for starting an investment account. Irrespective of family income, parenting skills can instill motivation, participation, and the investment habit in a growing child.

References

  1. Retirement plans for children: https://www.investopedia.com/articles/retirement/06/retirementforminors.asp
  2. Roth IRA for Kids: http://www.irakids.com
  3. Facts about retirement savings plans: http://www.pensionrights.org/factsheet-topic-areas/retirement-savings-plans
  4. IRS retirement plans: https://www.irs.gov/retirement-plans

Copyright © 2018 Douglas R. Knight