General Stock Investment Strategies/investing & future planning

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Question
Hello,  I am a 38 year old single mother of two, and a public school teacher.  I live in Illinois, and have some investment and future planning questions.  I make roughly $40,000 a year after taxes, with child support.  At this time, that's almost enough to pay bills and buy groceries.  My employer does take money out of my checks towards a retirement (TRS) for me, the problem being the state of Illinois failed to make payments to the retirement fund company, so we really don't have a retirement fund now, AND our state government, in their infinite 'wisdom' is trying to cut our deficit by cutting our retirement plans.  So, as it stands now, when I retire in 30 or so years, I will have nothing.  I cannot keep money in my savings due to cost of living and my low salary, let alone try to put something aside.

My questions to you are, as I am not familiar with anything related to stocks, bonds or the like, is there anything that I can take a small amount of money and invest it and just let it sit for my retirement?  I do not want to be able to access it until retirement, but possibly have the option of adding to it should I get an opportunity to gain a little bit of extra to put with it. I know that stocks, etc. are uncertain, but is there anything out there for me?

Please let me know if there's any further information you need from me.  Thanks for any help you can provide.

Answer
Hi Holly-
Sorry for the slow reply, busy around the holidays.

First as I understand it the Illinois TRS has had changes, but not a complete elimination of benefits. And there are apparently lawsuits filed regarding those changes. Point being that you should have some retirement income from your pension, rather than nothing. No doubt you're following those stories as closely as anyone, and once that's resolved - which could be months or years from now - you'll have a better sense of how much will be provided from that source.

Alongside that, the first thing that comes to mind is setting up a retirement account of your own where you can set aside money when possible. You should be able to contribute to a Traditional or Roth IRA each year, alongside those TRS contributions. One thing that can make that easier is the Retirement Saver's Credit; you may qualify for at least a partial credit depending on how much of that $40k is child support (which won't factor into the credit amount). If you opt for the Traditional IRA over a Roth IRA, you may also save some income taxes - if your tax bill is already low though, opt for the Roth where all future income and gains are tax free.

You can open an IRA many different places - banks, brokerage firms, mutual fund companies. Given your needs, using low-cost mutual funds bought directly from a company like Vanguard or T Rowe Price would be something to look into. Both offer "target date" mutual funds that invest in a mix of investment types, and gradually get more conservative as your target date (retirement date) approaches. They also have "balanced" mutual funds that mix many types of stocks and bonds. Both of these are types of investments that you could add to regularly for a very long time - years, decades even - without feeling the need to tweak them based on whatever the financial headlines are. And because the money would be in an IRA, it would be growing in a tax advantaged way, and somewhat inaccessible (there are typically penalties if you withdraw funds before age 59 1/2).

The other idea that comes to mind is the rest of your career - as you're still young! If the Illinois system simply doesn't provide enough pension benefits, and inadequate salary to save on your own, you may decide to work elsewhere someday. A better-funded school system, or a teaching job where you also pay into Social Security. Social Security benefits are based on your 30 highest years of income and it doesn't take much time to qualify for at least some benefits. And despite the negative hype, the system is relatively well funded and has payroll taxes as its funding source. So while each may not be huge on its own, between the Illinois pension, steady savings in an IRA, and perhaps Social Security earned from a future job, you may line up a decent amount of retirement income.

Lots of topics here so please post any follow-up questions you might have...

-Tad

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Tad Borek

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I am a San Francisco-based investment adviser and attorney.

Experience

I opened my investment advisory practice, Borek Financial Management, in 1999, and have been a licensed attorney since 1993.

I received my B.S from Cornell University, and a J.D. from George Washington University Law School.

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