Help Your Parents - Boomers Who Need Retirement Savings Help


What should my parents be doing if they are close to retirement age? My mom has very minimal contributions to a 401(k) and my dad has a federal retirement pension. Should they be contributing to 401(k)? Roth IRA? Traditional IRA?

In the next post Below is a good breakdown on the key differences between the three types of accounts. I haven’t yet had time to research the impact of the different accounts on estate planning (what happens when the account owner passes). Or how probate, having a Living Will or having a Living Trust will affect each. These are good questions to ask a professional.

I’m also working on just this information. I’m assuming they own a home and its going to be paid off soon. I’m assuming they don’t have their own business or corporation and that they don’t have any rental house income. A myriad of different things can really affect the recommendations below.

If your company is matching you MUST take advantage of the free money. Your mother should be contributing up to the maximum of her employer’s matching.

With the left over money or if her employer does not match your mother should be contributing $5k in catch up contributions to a Roth IRA UNLESS she expects to need to start taking distributions at 59 ½ (Remember the Roth IRA must be seasoned before distributions can begin). You can contribute to a Roth IRA up to age 54 ½ and then contribute to a second Roth IRA from 54 ½ to 59 ½ so that at age 59 ½ you can begin taking distributions of the first Roth IRA. Your dad should also be contributing $5k to a Roth IRA.

I recommend the Roth IRA over the Traditional for 3 reasons:

  1. The main benefit of the Roth IRA is you pay taxes now at a known tax rate. That rate is about as low as it’s ever been and a betting person would bet on it going up in the future. You might as well pay taxes at that lower rate.

  2. Since your dad will be getting a pension there may be income implications on taxes. Talk to a financial professional to determine if his pension will be considered a distribution (will not affect social security payments to them and will not raise their tax brackets) or considered as earned income.

  3. If your parents can live off their pension, 401(k) and social security, they won’t be forced to withdraw money from their IRAs. If they don’t need to touch it a Roth IRA is more flexible in paying for children’s down payment on a house or children’s or grandchildren’s education expenses.

If your parents still have more money that can be put in savings, consider putting more into the 401(k) or look at low cost annuities annuity but at this point a financial professional can best discuss your parents plans and figure out their current tax situation and plan their future tax situation.

As you get older, your risk tolerance lowers. When it becomes time to start living off your nest egg you cannot afford to lose money since you won’t have time to ride out the market fluctuations. As a general rule of thumb you should have 100-[your age] percent in stocks or stock funds and [your age] percent in CDs or bonds or bond funds. Your situation will vary and some people are inherently more or less averse to risk taking.