Questions from a friend

Questions:  I was wondering if you have some favorite web sites to get information about investing for a thirty something person.  And also for a teenager that has a part time or full time job.  In both cases, to save for retirement or even to save up for a down payment on a condo or house.

Thanks for your questions.  My advice to teens and young adults is to start an emergency fund before investing in securities.  They should gradually build a large emergency fund of dollars in the bank to use for job-loss and other big financial emergencies (see book called the Index Card in the Young Adults section of the link below).  

Teens who declare earned income to the IRS can deposit an equal amount of earnings in a custodial Roth account (see video on Hannah’s Roth account in the teens section of the link below).  It’s important for teens to learn how to open and manage an investment account such as the Roth.  In the Roth, I recommend holding a broad index stock fund for life; it will weather the ups and downs of the stock market over time (several good internet sites for teens in the link below).  

Thirty something persons need a tax-advantaged retirement account.  Employed persons should participate in their employers 401(K) plan [or similar plan] to the fullest extent above all other financial goals, with exception of building an emergency fund and getting out of debt as very top priorities; the condo and house are lower priorities.  Unemployed persons should check eligibility for SEPs, other retirement accounts, or IDAs (start with the “money basics” and sec .gov websites in the Young Adults section link)

Link: 

Copyright © 2019 Douglas R. Knight 

Saving for Unemployment

An emergency fund is used to pay 3-9 months of living expenses during unemployment. 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