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How Should This 44-Year Old Invest $18,000?

By JLP | May 12, 2008

I received this email last week:

Hi JLP,

I found your blog thru real simple magazine. Props to you. Nice.

So here is my question, 44 years old, female, broke my whole life, no savings, wanna change. Came into 18K (my Dad died) and I don’t know what to do with it. It has been sitting getting like 2% since December 07. So if you can help or have a suggestion great, if not I understand.

Thanks,

DG

First things first. If you’re broke, you probably need an emergency fund. If you don’t have access to 3 months of expenses, you need to save towards that goal first. Just make sure that you treat your emergency fund as just that: an emergency fund.

After that…

I try to refrain from giving specific advice on this blog. That said, I would DEFINITELY put this money away for the long-run by opening a Roth IRA and depositing $4,000 per year for the next 4+ years. As far as where to open your Roth IRA, I would say either a discount broker like Scottrade or a mutual fund company like Vanguard (I’m NOT necessarily recommending these companies). The easiest route to go would be a fund company like Vanguard. Vanguard offers lots of low-cost index funds as well as exchange-traded funds. The simplest route to go would be to go with a target retirement fund. Since you’re 44 years old, I would considering looking at Vanguard’s Target Retirement Fund 2030 (other mutual fund familes have target date funds that are worth looking at).

I wouldn’t stop there.

Based on some simple math, I figured that your $18,000 lump sum will be worth somewhere in the neighborhood of $65,000 at retirement (assuming a 9% rate of return minus a 3% inflation rate). That’s hardly enough for a comfortable retirement. I would make saving for retirement a big priority. If you have access for a company-sponsored retirement plan, use it. If not, you should try to save at least $4,000 per year towards your retirement. Doing so could give you nearly $184,000 at retirement (again, adjusted for inflation). It’s not a lot but it’s better than nothing.

Good luck!

Topics: Investing, IRAs, Mutual Funds, Retirement Planning, Roth IRA | 11 Comments »


11 Responses to “How Should This 44-Year Old Invest $18,000?”

  1. No Debt Plan Says:
    May 12th, 2008 at 1:11 pm

    If she’s broke and has no savings then she probably doesn’t know what a budget is or how to set one up. I would recommend doing that first. Besides, how are you supposed to know how much 3-6 months of living expenses would be if you don’t know how much money you are spending?

    Set up the budget first, see how much money you spend monthly, then set aside the emergency fund.

  2. Ben Says:
    May 12th, 2008 at 2:11 pm

    Just a note that the minimum for Traditional and Roth IRA’s is now $5,000 ($6,000 if 50yrs or older).

    The same thing happened to my mother who at 50+ also has been broke her entire life . . . She came into about $22K. She let it sit in a savings account with no plan. I had been linked to the account and watched her “save” it for about a year and then spend it little by little till it was all gone.

    Don’t do the same thing she did. Put your emergency funds in laddered CDs or some place where you won’t touch it.

    Then start saving for the long run with the rest of the money.

    A good book to read is “Start Late, Finish Rich” by David Bach.

  3. Customers Revenge Says:
    May 12th, 2008 at 3:05 pm

    184K for retirement? That is nothing. I wouldn’t stop there either. She’ll be working for a long time.

    She needs to think laterally. Get married to someone responsible with a bankroll perhaps?
    Sell things of value she may own and invest the money. Find more sources of income like a better paying job. Or maybe she makes a ton of money and can just trim back the lifestyle a bit.

  4. muddlehead Says:
    May 12th, 2008 at 3:52 pm

    you need to use the 18k toward training / education for a better job so you won’t be broke at age 46.

  5. Don Says:
    May 12th, 2008 at 8:28 pm

    Perhaps we should consider it irrelevant that it is a windfall. Invest it the same way you would invest other money.

  6. Wilson Says:
    May 12th, 2008 at 10:36 pm

    2% YTD already beats S&P500, congrats …

  7. Ron@TheWisdomJournal Says:
    May 13th, 2008 at 8:52 am

    First things first indeed! She needs to get with someone that has her best interests at heart and formulate a comprehensive plan. Investing the $18k is just one very small part of that plan.

    There’s so much we don’t know in this case:
    Does she have any high interest debt?
    Is she currently living beneath her paycheck?
    Does she have a budget?
    Does he have any other retirement opportunities (i.e. 401(k) at work)
    Does she need additional education to pump up her earning potential?

    The advice YOU gave was great, though. Her best first move was to ask you for some advice!

  8. KC Says:
    May 13th, 2008 at 9:34 am

    I think you are right on target – just keep it in a “liquid” savings account, money market, or CD and open up a Roth IRA. This way she’ll have an emergency fund and start saving for retirment. Each year she can dip into that money (and additional savings) to fund her Roth. She should also pick up a good basic personal finance book to help her get started. Personal Finance for Dummies is good despite the title. Go to the library and see if they have a copy

  9. Matt Says:
    May 14th, 2008 at 8:35 am

    Pay off any non-mortgage debt first and stop borrowing if you have a habit of doing so. Stash at least $1,000 in a separate savings account for emergencies, max out your Roth IRA contribution for 2008 ($5,000), and max out an employer plan if you have one ($7,500).

    Use the remaining $4,500+ to further pad your emergency fund or save it in a money market or savings account until you decide how to invest it. Such as using it for your 2009 Roth IRA contribution.

    (This advice assumes the $18,000 is your after-tax take-home money from the inheritance. If you haven’t paid taxes on it, plan on losing $9,000 of it, just to be safe.)

    More importantly than the specifics, I would take care in how you handle this situation. $18,000 is a nice sum of money, but it’s not like winning the lottery either — it’s not enough to quit your day job and start living it up. Life has indeed cut her a break and given her an opportunity to get on her feet, but she will need to reform habits and attitudes if the benefit will last.

  10. David Says:
    May 15th, 2008 at 11:17 am

    I agree that she should look at high interest debt first. Then, put the balance in a money market account and each year move the maximum into a Roth IRA stock fund.

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    May 16th, 2008 at 4:36 am

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