Flowers, dining out, other soon-forgotten gifts for mother....
Flowers fade.... All the restaurants will be packed on Sunday; is this what you want when Covid still threatens?
How about something that will last?
What about an Individual Retirement Account for Mom? Whether currently employed for pay or a full-time homemaker, more than short term gifts, mom needs some long term financial security in the form of a retirement account. While IRAs generally need to be funded with earned income, a spouse of an earner is eligible for an IRA.
Women are at much higher risk than men of financial insecurity in later life. Now is the time to start funding an IRA to ensure long-term financial health for mom.
You can start an IRA with as little as a dollar (but mom deserves more than that) at Charles Schwab.
IRAs come in two varieties: traditional and Roth (named after a senator who sponsored the legislation). With both IRAs federal and state income taxes on the gains are deferred. The traditional IRA offers an income tax deduction for contributions, but you must pay taxes on the funds when you withdraw them in the future. With a Roth IRA there is no income tax deduction for your contributions; a Roth is funded with after-tax dollars. The money grows tax-free and withdrawals are tax-free. With the lower income tax brackets (2018 tax law) fewer taxpayers benefit from a tax deduction for contributions, thus Roth IRAs are usually the best choice.
For an explanation of IRAs and the differences between the two options see: https://investor.vanguard.com/retirement/savings/iras
https://investor.vanguard.com/ira/roth-vs-traditional-ira
Great info on investing for retirement: https://investor.vanguard.com/retirement/savings/
Also: https://investor.vanguard.com/retirement/savings/retirement-funds
Where to invest?
Vanguard is one of the best places to invest because the company is investor-owned and charges very low expense ratios. Vanguard mutual fund company, like a credit union, is owned by the people who invest their money in the funds offered by the company. Other large well-known mutual fund companies like Fidelity and T. Rowe Price are owned by outside investors who own stock in the company. These companies need to make profits for their investors so they (usually) charge higher expense ratios on their funds than Vanguard.
See: Getting started investing: https://investor.vanguard.com/investing/how-to-invest/
What is a mutual fund?
The best way to start is to open a Roth Individual Retirement Account (IRA). If you start investing now you will take maximum advantage of compound interest. See: https://investor.vanguard.com/investing/how-to-invest/risk-reward-compounding
Load vs. No-Load funds. Always choose a no-load fund. Buy directly from the mutual fund company. Avoid going through an advisor who charges a load (commission), typically 5% of every dollar invested, every time you invest.
Target Retirement Funds are a great choice. https://investor.vanguard.com/mutual-funds/target-retirement/#/
Check out the 2055 Target Retirement Fund (VFFVX) or other suitable estimated retirement year. (Every mutual fund has a unique 5 letter symbol to identify it). Or choose a fund corresponding to the year you may want to retire. Vanguard TRFs consist of four underlying index funds (U.S. stocks, bonds & international stocks & bonds). The company automatically rebalances your assets over the decades, so the fund becomes more conservative as retirement nears.
What’s an index fund? https://investor.vanguard.com/mutual-funds/index-funds
Mutual Fund Expenses. Every mutual fund charges an annual expense ratio which is a % of all assets that the company uses to pay employees and run the fund. This % isn’t deducted from your account but from the entire fund each year. You want to pay the least % possible in annual expenses so more money stays in your account to grow. Index funds charge the lowest expenses because they involve the least amount of work and trading of securities.
The expense ratio for Vanguard’s 2055 Target Retirement Fund (TRF) VFFVX is 0.16%. The average expense ratio for mutual funds is about 0.75% to 1.5%.
The minimum investment for Vanguard TRFs is $1,000. If $1,000 is too much to start, another option is Schwab (another mutual fund company) target retirement funds. http://www.schwab.com/public/schwab/investing/accounts_products/investment/mutual_funds/mutual_fund_portfolio/target_funds\
Schwab charges a similar ultra-low expense ratio: but only requires $1.00 to open an account. Check out the Schwab Target Index funds. The Schwab Target 2060 Index Fund (SWYNX) charges only 0.08% annual expenses.
Once you open your account with the minimum required, it’s important to set up an automatic monthly contribution to the IRA. This process of investing the same dollar amount each month is called “dollar cost averaging” which results in buying more shares when the price is low and fewer shares when the price is high. http://www.investopedia.com/terms/d/dollarcostaveraging.asp
Update: Fidelity just started (summer 2018) offering a couple of no expense ratio no minimum investment index mutual funds. https://www.fidelity.com/mutual-funds/investing-ideas/index-funds (Note: these are NOT target retirement funds).
NEW Fidelity® ZERO Total Market Index Fund (FZROX)
- Seeks to provide investment results that correspond to the total return of a broad range of publicly traded companies in the US.
· There is a 0% expense ratio and no minimums to invest in FZROX
NEW Fidelity® ZERO International Index Fund (FZILX)
- Seeks to provide investment results that correspond to the total return of foreign developed and emerging stocks.
· There is a 0% expense ratio and no minimums to invest in FZILX
Read Jonathan Clements’ take on the no-fee Fidelity funds: https://humbledollar.com/2018/08/low-fidelity/
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