Reader’s question: I’m in my early sixties and have $81,000 in my bank money market account and don’t know what to do with it. I have never bought a stock or mutual fund in my life. I’m obligated under a court decree to pay for my son’s (age 14) college, which may mean I can never retire! I have a 529 college savings plan with my broker but I’m very unhappy with the results. It seems to hover around $18,000 to $20,000 with no real growth over the past several years. I also have a PACT plan in place but who knows what that fund will do between now and his high school graduation. I also have a $330,000 annuity which could start paying me annually beginning this year. My wife will retire four years from now with a state retirement plus she has $52,000 in her TIAA-CREF retirement plan. I’m self-employed and must use $17,000 of my $81,000 for my September quarterly tax estimate unless there is some way to defer paying that tax. I’ve considered paying down on my $111,000 mortgage; buying Southern Company stock; invest more in my anemic 529 plan; or just leave the money in the bank. What do you suggest? B.N.
Answer: Wow! That’s a lot of embedded questions so let’s break it down into its various parts. First, continue to hold the $17,000 you’ll owe the government at your bank. If your 529 plan is not in the Alabama State plan, consider moving it there (www.collegecounts529.com). Transfers for out-of-state plans or new contributions will get you a state income tax deduction worth up to $500 for transfers of up to $10,000 per year (based on a joint tax return). Under the Alabama 529 plan, I’d recommend using the no-load Vanguard funds which are very low cost as compared the brokerage firm option. Since you don’t have a lot of experience investing in mutual funds, consider the ‘moderate’ age-based portfolio at Vanguard. They will automatically ‘adjust’ the investment allocation to make it more conservative as your son approaches college age. As for the Alabama PACT plan, there continues to be litigation to determine just how much money must be paid to plan participants but I believe the end result will be substantial benefits for your son.
Unless you must have the additional monthly cash flow that would come from ‘annuitizing’ your annuity, I’d recommend postponing electing that option until interest rates rise which seems bound to happen within the next five years. Likewise, paying down on your mortgage doesn’t sound like your best move. When you pay down on a mortgage it does not lower your monthly payment so you haven’t helped your cash flow situation at all. It also ‘locks-up’ the funds you used for the pay-down. For example, if you took $50,000 and paid down on your $1,200 per month mortgage, your payment would still be $1,200 per month and if you needed to retrieve your $50,000 for an emergency, you couldn’t get it without the time and expense of refinancing. Do check to make sure your current mortgage interest rate is competitive with rates being offered. Current 30-year rates are about 3.5% while 15-year rates are about 2.9%.
I like Southern Company with its 4.3% dividend and excellent long-term performance. However, if you’re going to jump into stocks, you’ll want to own a basket of at least 10-20 blue chip companies that span a number of different industries. Blue chip stocks are a good choice for monies that you’re certain you won’t need for a minimum of five years.
Your situation with all of its moving parts screams for professional help so consider meeting with a Certified Financial Planner. You can find one near you at www.CFP.net.