Investment advice?

We have a bit of an unusual situation with our two boys, both in their mid-20’s. 

Without getting too long-winded into details, they have no social life or friends, have never dated, but also have no real hobbies/interests/goals/etc. We helped them get an apartment 6-months ago, and despite them both having menial low-paying jobs, their savings accounts continue to grow. Our oldest son has over a year’s worth of income in savings, while his younger brother has slightly less. 

I’m thinking it would be a good idea to have them start diverting their spare income into some type of investments, correct? Considering I’m pretty bad with money(see recent thread about 2 Miatas), I have no advice I can give them - so I turn to you guys. 

What can we help our boys setup so they’ll be in a good place financially, hopefully for life?

1. get 401k match
2. max HSA account
3. max Roth IRA
4. finish maxing 401k
5. taxable investments

90% total market, 10% bonds

First off, congrats to both of them for being so diligent with saving money! That's a real skill and will serve them well.

Second, I would recommend they both make a budget, list all income and expenses (including planned expenses such as car insurance, gas/heating/utilities etc). This gives a rough estimate as to what they really have left over. 

Third, set aside excess funds into a separate bank account until they have each saved the equivalent of one year's worth of expenses. This is the "emergency fund". Not to be confused with the "miata fund" or the "craigslist gotta have it fund". Leave this reserve in the account so it is truly accessible in an emergency. Invested funds will need to be liquidated before you will have access to the money, but funds in a bank account are readily accessible. 

Then it is time to look at paying off any outstanding debt. Opinions vary as to whether you should tackle the debt with the lowest balance or the highest interest rate first, but pick one and tackle it. Make a payment that is more than the minimun each month toward the principal. Once one balance is paid off, roll that amount towards the next debt and so on until all debt is paid off. This is called the snowball. If there is no outstanding debt, move on to the next step.

Time to consider a retirement plan. If their employers offer a plan with matching funds, I recommend starting there, with a contribution that gets them the maximum matching dollars from the employer, and no more. Anything that they have over that that they want to invest should go into a Roth IRA to get those funds into an after tax environment. Generally better to pay taxes on those funds now while young and employed, rather than in retirement when you are on a fixed income.

Once retirement plans are maxed out, look into a retail investment account. What you choose to invest in here will depend on your goals and risk profile. 

Do they have a 401k option? If so, is there a Roth option? Is there a match? Are there good funds?

if the answer is no, then max out the Roth IRA, I recommend Vanguard as the broker because in situations like this I recommend VTSAX as the fund. If they haven't filed taxes for 2017 you can still make the contribution for 2017. 

If a different answer to my 401k question we get get more involved. Happy to help offline if you want. 

1. get 401k match
2. pay off high interest debt
3. max HSA account
4. max Roth IRA
5. finish maxing 401k
6. taxable investments
7. pay off low interest debt

more complicated list, if debt is part of the equation.  #0 is living expenses/bills, obviously.

Different strokes for different folks.  #4 and #6 on my list above can both work as an emergency fund, and a CC or 2 can be used as a financial 'capacitor'.  So can a HELOC.  Emergency fund in all cash = waste of money.

In reply to EastCoastMojo :

Honestly, it’s not a conscious choice, it’s just who they are. They would have been equally as content to live out their lives under our roof, but we want to do everything we can to help them be self-sufficient when we’re gone. 

Also, I should have mentioned that other than their rent/utilities/food/vehicle expenses, they’re completely debt-free. Their cars are new enough to last them for many years, and they have zero interest in cars, so they won’t replace them until I tell them to. 

In reply to mtn & ProDarwin:

Isn’t HSA for healthcare only within the current year? They have no medical expenses. 

They are both participating in each of their employer’s 401k plans, but I don’t remember their contribution amounts. I don’t think either of them are maxed, since we weren’t sure what their living expenses would be yet. Sadly I would have no clue about good vs. bad funds, this is a realm I’m just unable to grasp. :(

If they should get IRAs, which one(s) should they get, and how much/how frequently should they invest?

If they each put 1-year’s living expenses into a separate account, should they continue adding money to their main savings accounts?

Pete Gossett said:

In reply to mtn & ProDarwin:

Isn’t HSA for healthcare only within the current year? They have no medical expenses.

An HSA rolls over for future use and can accumulate.  A Health Flexible Spending Account (FSA) is lost if not used in each calendar year.

I'm a fan of Roth IRAs, for the reason stated above.  There is a max contribution for the tax year, and as stated they still have time to open an IRA and contribute up to the max for 2017 if they have not already filed their 2017 returns.

They can invest at any frequency they choose up to the max for the year, so monthly, quarterly or all on one lump. If I remember correctly, the max on ROTH is 5500 and traditional IRA is 6500 per year. Once they have reached the point where they are maxing the 401k (contributing just enough to get all the matching funds available) and the ROTH, then I would look into a traditional IRA.

Can anyone get an HSA? My employers have never offered one. 

Why should I open a ROTH IRA instead of just bumping up my 401K above the match if I'm not at the max already of the 401k?

Duke said:

Pete Gossett said:

In reply to mtn & ProDarwin:

Isn’t HSA for healthcare only within the current year? They have no medical expenses.

An HSA rolls over for future use and can accumulate.  A Health Flexible Spending Account (FSA) is lost if not used in each calendar year.

I’m sorry Duke, I still don’t completely understand. So an HSA is for healthcare, just without a “use-by” date? The idea of investing money into something that could only be used for healthcare sort of terrifies me. Sure, they’ll likely have healthcare expenses at some point in their lives, but there’s no family history of genetic medical problems that would likely be a large expense. 

In reply to EastCoastMojo :

Is one Roth IRA better than the next? Do we just call up Charles Schwab & set one up?

In reply to Erich :

401k funds are taken pre-tax, which means that you will be taxed at the time of distribution. It's likely that those distributions will occur at a time that either the tax rate is higher than it currently is, or you will be in retirement and therefore on a fixed income, or both.

Some additional info from Timeinc.com

A Roth IRA is a far different savings vehicle than a 401(k) plan. Having one will give you more flexibility in retirement. Your 401(k) plan is funded with pre-tax dollars that grow tax-deferred. You pay tax when you start taking distributions no later than your 71st year. A Roth IRA is funded with after-tax dollars that grow tax-free for the rest of your life and that of your spouse, and they have tax advantages for your heirs as well. You can also take early distributions of the principal that you contribute, without penalty or tax, should you run into a cash crunch. So after you have each maxed out your 401(k) match, shift to a Roth IRA. Each of you can save up to the $5,500 annual limit.

ProDarwin said:

  Emergency fund in all cash = waste of money.

What would you recommend instead?

 

In reply to Pete Gossett :

A ROTH is just a vehicle, what you invest in is up to you. The financial advisors I work for will often recommend a target date fund based on the expected retirement year. Many fund companies offer target date funds for retirement, and they are composed of a group of investments, often exclusively mutual funds. These can offer diversity in your investments rather than just picking a single fund, so you spread out your risk. 

For clients that are one one end of the risk profile or another  (more aggressive or more conservative rather than "balanced" or in the middle), the advisors may pick specific funds to invest in over a target date "blended" fund. It all depends on how risk-adverse the individual is and the length of time the money is expected to be invested. 

Full disclosure: I make no claims at being an expert. I work for financial advisors and this is the advice they give the majority of their clients. 

In reply to ProDarwin :

What's a HELOC? I haven't heard that term before

Erich said:

Can anyone get an HSA? My employers have never offered one. 

HSAs are only available if you're in a qualifying, high deductible health plan. If you have a "normal" plan, you can't get an HSA.

RevRico said:

In reply to ProDarwin :

What's a HELOC? I haven't heard that term before

Home Equity Line Of Credit

IOW a credit line that's secure on your house.

Pete Gossett said:

In reply to EastCoastMojo :

Is one Roth IRA better than the next? Do we just call up Charles Schwab & set one up?

I've looked into this a bit, and any of the usual low cost providers should be fine. We've got one with Vanguard and one with Schwab, happy with both.

Pete Gossett said:

Duke said:

Pete Gossett said:

In reply to mtn & ProDarwin:

Isn’t HSA for healthcare only within the current year? They have no medical expenses.

An HSA rolls over for future use and can accumulate.  A Health Flexible Spending Account (FSA) is lost if not used in each calendar year.

I’m sorry Duke, I still don’t completely understand. So an HSA is for healthcare, just without a “use-by” date? The idea of investing money into something that could only be used for healthcare sort of terrifies me. Sure, they’ll likely have healthcare expenses at some point in their lives, but there’s no family history of genetic medical problems that would likely be a large expense. 

Yes, you are more or less correct. However, that can include routine maintenance, as well as dental, eye exams, glasses, contacts, etc with pre-tax dollars. It’s one way to write off your medical expenses if you don’t itemize. 

Erich said:

Can anyone get an HSA? My employers have never offered one. 

Why should I open a ROTH IRA instead of just bumping up my 401K above the match if I'm not at the max already of the 401k?

No, and they are usually attached to High Deductible Health Plans (HDHP)

Pete Gossett said:

I’m sorry Duke, I still don’t completely understand. So an HSA is for healthcare, just without a “use-by” date? The idea of investing money into something that could only be used for healthcare sort of terrifies me. Sure, they’ll likely have healthcare expenses at some point in their lives, but there’s no family history of genetic medical problems that would likely be a large expense. 

Once you hit retirement age, you can withdraw from it just like a traditional IRA.  Also, you can invest in it, so once they hit a reasonable amount in them, they can only tap the earnings for health care and rest comfortably knowing they won't have to worry about paying for health issues in the future.

Pete Gossett said:

In reply to EastCoastMojo :

Is one Roth IRA better than the next? Do we just call up Charles Schwab & set one up?

Yes, there are better and worse.  Look into what funds you have access to.  I'd recommend Vanguard or Fidelity.

rustybugkiller said:

ProDarwin said:

  Emergency fund in all cash = waste of money.

What would you recommend instead?

1)  Emergency funds are not used often, only in emergencies.

2)  If you need to pay for something like $10k or less, max out a few credit cards.  More than that and you'll have more than a couple of days to come up with the money anyway.  Use a HELOC, draw from the principal of your Roth, or pull from taxable investments to cover it (and pay back any CC if you need to use one to cover stuff for a few days).  All 3 of those investments are liquid enough.   If its a long term thing, just pull from Roth/taxable as needed.

Getting away from the topic at hand, but I always open a new credit card every 15 months or so with the introductory 0% rate and $0 transfer fee. Rarely gets used, but if I have an emergency I can get by with a free loan. 

In reply to mtn :

That will work for emergencies that you can pay for with a credit card. Most of those offers don't apply the 0% rate for cash advances, it's much higher than even the post-introductory rate. If, for instance, you had a trip to the er and no insurance to offset the cost, even making installments on that debt can get expensive using a card for cash with the interest. Good as a backup, and certainly good for your credit to have an active card that you can use and pay off regularly with no interest, but not my first choice for emergency cash.

If you have an ER trip, you don't need the money in hours, days, or even weeks.  Get it from your Roth principal, HELOC, or taxable investments.  The same applies to almost all other 'emergencies'.

The main reason I recommend a cash emergency fund over just maxing out credit cards in an emergency is twofold. Many people will run their credit limits on their cards near to max most of the time for whatever rewards advantages they provide and in a true emergency that may leave them without the ability to have that large credit loan when they truly must have it immediately.

Second, it could end up in a situation where once that money is spent they will not be in a position to pay it back on time plus the burden of doing that during a possibly drawn out emergency, incurring huge penalties and interest. whereas a cash emergency fund can be used up without the worry of paying a creditor back. You will just have to rebuild it, and you can do that at your own pace.

that said because a years worth of expenses is a very large chunk to accumulate and also to be sitting doing basically nothing in the meantime between uses, I recommend and follow my own advice of 3 to 6 months of expenses, with a small amount of that in a safe at the house and the bulk in a money market account at the bank where I can get to it on any day. (via teller, atm, debit card)