Question: John in Loveland: My daughter (who is 16) had her first summer job this year. Right now, her earnings are sitting in a savings account. Is this OK, or should we be doing something else with that money?
A: Right now, that money she worked so hard to make probably isn’t earning a whole lot of interest given that the nationwide average for a savings account currently sits around 0.06 percent. Put another away, that’s just three dollars for every $5,000 saved. If she wants to spend this money soon, the savings account is appropriate. But if this money is not needed within the next few years, she’ll get a much better return over the long term if she invests that money in the stock market. And, no, we don’t mean picking individual stocks; just keep it simple with an index fund that tracks the S&P 500, which is compromised of the country’s 500 biggest public companies.
And before you get worried about stock market turbulence, remember, your daughter has decades upon decades in front of her. This extended time horizon will allow her to ride out the market’s ups and downs while also benefiting from the magic of compounding. Just consider this: If she would invest $5,000 and earn 7 % a year, after 50 years that amount would grow to more than $147,000 – and that’s assuming she never adds to it.
Additionally, if she uses a Roth IRA to house this money, that $147,000 would come out tax free. That’s why we always recommend this kind of account to younger investors who are likely in a low tax bracket. Because while there’s no up-front tax break, they’ll benefit more from the long-term, tax-free growth. For 2021, your daughter can contribute up to $6,000 in a Roth IRA or up to however much she earned – whichever is less. You could also consider a ‘matching program’ for her if you’re financially able to do so. For example, if she earned $5,000 over the summer and wants to invest $2,500 of it, you could ‘match’ that contribution for a total investment of $5,000.
The Allworth Advice is that your daughter’s earnings should be working harder for her than just sitting in a savings account accruing basically zero interest. Take advantage of her lengthy time horizon and open a ‘custodial’ Roth IRA on her behalf (since she’s still a minor). Her future self will thank you for it.
Q: Diana in Cheviot: How do I know if I need long-term care insurance?
A: : No one knows if they’ll need long-term care in the future. But the odds are pretty good. According to the Administration for Community Living, someone turning 65 today has about a 70 % chance of needing some kind of long-term care during the remainder of their life. This could range from the occasional need for in-home help, to spending an extended amount of time in an assisted living facility or nursing home. And the average cost of these kinds of services can greatly vary. According to the insurance company Genworth, the current average monthly cost for an in-home health aide in Cincinnati is about $4,800 while the average monthly cost for a private room at a nursing home is just over $9,500. And long-term care costs aren’t covered by Medicare.
This is when a long-term care insurance policy can help, but premiums can be pricey; a single, 55-year-old female will likely spend about $2,700 a year on premiums according to SmartAsset. Nonetheless, if you’re curious, get quotes on a policy that would cover at least three to five years and see if it’s affordable for your situation.
Here’s The Allworth Advice: Some people can self-insure (meaning they’re able to pay for long-term care expenses out of pocket), but others can’t. A fiduciary financial advisor can look at your whole financial picture to see which camp you fall into. Either way, we recommend everyone should at least financially prepare for the possibility that long-term care will be needed in retirement.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend or someone in your family has a money issue or problem, feel free to send those questions to [email protected].
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com.
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