Expert: Gina Boykin - 8/27/2009

Question
I have an inherited IRA which has approx $31,000 in it. It is just sitting in the bank making minimal interest. My husband is 50 yrs old, I am 52. We have about $10,000 in savings. We have no money saved for our 15 yr old for college. My husband receives a $1300 mo pension and has about $40,000 in his 401k. I am self employed doing daycare at home, so no 401k for me. Our combined income aside from the pension is about $60,000 yrly.  My bank is urging me to take some of the IRA money and invest it.  I am hesitant to tie up any of the IRA money for 5,7 or 10 yrs in some sort of investment account as we have always thought we could use the IRA money for emergencies should we ever need a large sum on short notice. Also - I am due to receive approx $20,000 (maybe a bit more) from my brothers estate early next year.  I don't want to be too risky with the money - we just cant afford to lose any. But I do worry about what will happen to us in 10 - 15 yrs when we are no longer able to work.  Any extra money we can make will keep us that much further away from living in our car someday.  What would be the best way to make that money grow?  And how much of it can we afford to tie up for a period of time? Or should we just not touch it and let it sit there and act as part of our emergency fund?  Thank you for taking the time to answer my concerns.

Answer
Let's first figure out exactly how much of an emergency fund you need.  Since there is no risk of income loss of the pension, the only significant emergencies are loss of your income, major medical emergency (since you are self-employed, depending on the type of insurance you have# and home or auto loss.  To cover yourself for a year, add up your monthly expenses and multiply this by 12.  This will tell you how much you need to cover your expenses for 1 year.  Add to this any insurance deductibles #medical, auto, home#, if they are large deductibles.

Since pension income will be coming anyway, you can subtract the amount you will receive from this source #$1300 x 12 months in this example).  This will tell you how much you need in a 12 month emergency fund.  If you feel you need more than 12 months, just do that calculation for the number of months that YOU feel comfortable with.

Also, if you plan to pay any college expenses, determine that amount now, because you don't want that to be invested at this point.

Emergency fund and college expense money should be in plain old savings, CDs, or money market accounts.

Whatever is left after your emergency fund and college expense calculation can be invested for the long-term. Keep in mind, anything you invest should be something you don't plan to use for atleast 10 years.

Don't let anyone pressure you to invest more than you are comfortable with. The person urging you to invest is probably someone who will benefit through commissions, etc, so you have to do what is best for you and your family!