Q. My son turned 18 at the end of January. Last year he worked and received a W-2 for a little over $5,000. He wants to put $5,000 into a Roth IRA with the intention of not touching it until he retires. The Roth IRA seems like the best option to me. Do you agree? Can you recommend a favored fund that would be low-maintenance over the many years or at least a good place to start? —S.F., Akron, OH
A. Investing through a Roth IRA is a good idea. He doesn’t need a tax deduction and the money will grow tax-free for a very long time. The low-cost path is for him to start a Roth at Schwab and invest in their U.S. Broad Market exchange traded fund, ticker SCHB. It has a tiny expense ratio—0.03 percent— and will do better than the vast majority of managed domestic stock market funds over the next 40 years, simply due to minimal expenses.
I’m not so sure, however, that he should put every dime into a Roth. There is a lot to be said, particularly for young people, for having cash on hand to facilitate freedom and opportunity. So maybe he should invest $4,000 and hold $1,000.
That money, and more that he can add later, can be used to buy things cheap (and without financing) as opportunities present themselves. The money can also help him to stand tough in any salary negotiation. Workers who have some money in the bank are in much better shape than workers living paycheck to paycheck when it comes to pushing for a raise. Your son needs to remember that he is the best investment he can make, so having some cash on hand can be worth more than any stock market investment in both the short and long-term.
Q. My dilemma concerns my long-term care Insurance. It comes up for renewal in April. I am 82 years old and live alone in a gated community for seniors where I rent my duplex for $1,500 a month. I am in good health, with no physical/mental problems.
I took out a long-term-care policy in 1999. The original policy premium was $1,318 a year. It remained at this yearly rate until 2014, when it was increased to $1681 (almost a 30 percent increase!). Now I have just received notice of a new increase to $2,185 (another 30 percent increase!). I have a comfortable yearly income from Social Security and required minimum distributions from my IRA, amounting to about $6,500 a month in disposable income (after taxes).
Here’s my question: Should I keep the LTC policy, that will probably keep increasing in cost, as I age and the risk of needing to utilize its benefits increases—or should I just cancel and rely on my assets to care for me should I need to?
—N.M., Cleburne, TX
A. There is no obvious and clear answer for this. The most recent Genworth survey of nursing home costs, for instance, shows a national average annual cost of $80,000 and a $51,000 average annual cost for Texas. So it is likely that you could cover the cost of care from your RMDs and Social Security benefits.
On the other hand, if you continue the policy at $2,185 a year, you’ll recover nearly two years of premium payments for every month of covered nursing care— if you go into nursing care. That means a short stay will “pay for itself” if you continue the policy. It’s a better bet today than it was in 1999.
What concerns me is getting the policy activated if and when you need it. As a single woman who mentions no relatives, you’ll need someone to advocate for you and fill out all those claim forms. When I asked readers about their LTC policies in early 2014 the most common response was that putting claims in motion wasn’t easy.
Charitable giving goals, if you have them, may be a good reason to keep the policy—— keeping the insurance would increase the odds that you would have some real value in your estate since your assets would not be drained to cover nursing home expenses.