Photo: Robert Trachtenberg
Q: I'm in my early 30s and have been living with my 45-year-old boyfriend for almost a decade. We own a house and have joint and individual checking accounts, Roth IRAs, a will, and power of attorney documents—everything you recommend. My concern is that my boyfriend isn't saving enough for retirement. At my urging, he started a Roth IRA but has invested less than $5,000 in it. He is anticipating a $150,000 inheritance from a relative to see him through retirement, which I don't think will be enough. I'm worried that I'll end up supporting us both.
A: Your boyfriend is being irresponsible. Anticipating an inheritance and receiving one are two different matters. Given that so many of us are living longer, combined with an increased need for care as we get older, the reality is that the money family members intend to bequeath can end up going toward their own living costs. If your boyfriend does eventually receive the inheritance, it could come when he's well into his 60s—is he prepared to wait that long? Even then, $150,000 isn't a windfall he can rely on to cover all of his retirement costs. To live off of the money, he will want to invest it conservatively in bonds to generate income and avoid eating away at the principal. I'm going to be generous and assume he'll earn 5 percent interest annually in a municipal bond (which is exempt from federal and often state income tax). At that rate, his $150,000 would generate about $625 a month. I bet that's not enough to pay for his living costs as well as all the expenses that come with enjoying one's later years (travel, going out more often, etc.).
Your partner needs to grow up rather than hope his rich relatives and conscientious girlfriend will bail him out. I get the sense that the good financial choices you've made together are the result of your planning and initiative, not his. It's okay for one person to be the leader, but both of you have to take responsibility. If he isn't up for that, you need to rethink the relationship—and all the money you put into it.
When he's ready to get serious about saving, I want your boyfriend to turbocharge his Roth IRA. The annual maximum contribution is $5,000 if you are under 50 years old and earn less than $101,000 ($159,000 for married couples); it's $6,000 a year if you're 50 or older. Pleas factcheck maximum contributions for 2012 since they change every year And tell him I said he'd better be taking advantage of any retirement accounts offered through his job, such as a 401(k). Many employers will match your contribution if you agree to have money deducted from your paycheck and invested in the account. That match is like a bonus; don't turn it down. Because your partner is getting a late start, he should put money in a regular taxable investment account and choose low-cost index funds or exchange-traded funds. Today's tough economic climate makes it more important than ever to minimize the fees you pay on your financial accounts.
Saving for College
Q: I have two daughters in junior high school, and not a penny saved for their college educations. How can I play catch-up quickly?
A: Even if you're starting late, the important thing is to start—but you need to take the time to plan the right way to save. Desperation can lead to rushed, unsafe investments, and the worst thing you could do for your daughters would be to put your money at risk in an attempt, as you say, to play catch-up. The expenses of college are daunting, and for many parents—especially those with more than one child—the thinking is, 'I'll never manage.' You need to get out of that mindset, because saving for college can begin with a few very simple actions.
Since you know you'll need to begin spending your savings in four to five years, be conservative. Keep your money in high-yield money market funds (you can find the ones paying the best interest rates at www.ibcdata.com), treasury notes, certificates of deposit and series EE bonds. The steps to open these accounts are quick and simple and can be completed right at your local bank, but you need to start very soon. You should also remember that as the cost of higher education increases, both the government and colleges are beginning to offer more financial aid in the form of grants, loans and work-study programs. More than half of all undergraduate students are awarded some form of financial aid, so the odds are you won't have to shoulder the financial burden on your own. The most important thing, though, is for your daughters to see you taking responsibility for your money. True education starts with messages that are passed down.
Next: Why money and friendship don't mix well