“Obviously, I don’t have much money to invest since I don’t have much money,” he said.
What Freddie does have is a generous father.
His dad established a trust for Freddie and his sibling. The trust pays Freddie’s student loan payments. The trust also pays premiums on a $2 million life insurance policy on Freddie’s dad’s life, and Freddie is the sole beneficiary. Someday when Freddie’s dad passes, Freddie will get $2 million tax-free.
Freddie, whose name has been changed, has $50,000 in a savings account and a minimal amount in checking. He lives rent-free in his dad’s home, so his expenses are very low.
The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Freddie get and stay on the right path for a successful financial future.
“Freddie is like many young adults these days,” Duerr says. “After all of these years of education and study, he has not been able to obtain full-time employment in his field.”
Freddie is trying to make the best of it by taking on part-time gigs, and that’s what’s giving him his income.
Because Freddie doesn’t work full time and his income is sporadic, his resources are minimal. He’s fortunate that he can live without paying rent, so he can keep his expenses low.
“This is critical for the near term as he is not optimistic about finding full-time employment in the current environment,” Duerr says. “As a result, he is concerned about planning properly for his future.”
One of Freddie’s biggest concerns is saving for retirement. Because he’s not currently employed, he does not have access to any type of employer-sponsored retirement plan. Duerr says his only option at the current time is to open an IRA. At age 28, Freddie can contribute $5,000 a year to an IRA.
“Given his situation and his young age I would strongly suggest he consider opening a Roth IRA,” Duerr says. “He will not get any type of tax break for his contributions, but the assets will grow tax-free and provide tax-free withdrawals in retirement as long as they are considered qualified.”
Even without current investments, Freddie knows how he feels about the stock market. He describes himself as risk averse, and he says he’s concerned about the overall volatility the stock market has experienced over the last few years.
“While it is prudent to not take on too much risk given his age, he should not be overly cautious,” Duerr says. “He has over 30 years until he can retire. As a result he has time to ride out both good and bad market cycles.”
Duerr says because Freddie is young, taking on a little more risk now is wiser than possibly needing to try to obtain a better rate of return later in life when he won’t have as much time on his side before retirement.
Duerr says it would make sense for Freddie have a higher proportion of equity-based investments. As he ages, this mix will reverse and he should focus more on fixed-income investments.
Once he starts investing, Duerr says Freddie should review his overall investments annually to determine if the investment allocation is appropriate.
Unlike most people, Freddie is very fortunate in that he is expecting to receive a generous inheritance from his father. Duerr warns, though, that Freddie shouldn’t count his chickens.
“I would not solely rely on this for his retirement,” Duerr says. “His father is still fairly young and hopefully will live a very long life. As a result he will most likely not have this inheritance for 20 years.”
Freddie says he doesn’t see any significant increases to his expenses in the near term. He has no intention of buying a home or any other big-ticket items, either.
But, Duerr says, Freddie should take more advantage of this low expense time.
“I would strongly suggest he continue to save for his future,” he says. “Once he does obtain a full-time job, I would suggest he continue to save for his future and certainly for his retirement.”
Freddie has $50,000 in a savings account, which Duerr calls a great start given Freddie’s lack of full-time employment.
“I would hope he continues to save while he can because you never know when something changes in your life. Having the funds available to help pay for a large purchase or an emergency is important,” he says, noting a good rule of thumb is to try to have six months to a year’s worth of living expenses in an emergency account.