Readers Asks Where to Invest Now?


Reader Question: I am 67 and retired in May 2012 with $20,000 in stock mutual funds. When things tanked in 2008-09, I lost 50%-60% and it stayed there two years plus. I since moved it to an interest-only account. Now, my question is: Should I do something else, rather than leave it in the interest only account? A.F.
Answer: The best answer will depend on other personal financial information. First, you’ll want to make sure you have adequate financial reserves should you need access to cash on short notice. Assuming that you can afford to leave this money invested for at least five years, I believe there is much more opportunity in stocks rather than money market accounts, bonds or bank CDs. Bonds could see downward pressure as interest rates rise over the next several years. Corporations, on the other hand are experiencing good earnings and improving balance sheets, a condition I suspect may continue over the next three to five years. The biggest wildcard for stocks is how the Federal Reserve will handle on-going monetary stimulus. At some point the Fed will begin tapering off the $85 billion per month bond buying and that could cause stocks to retrace some of their recent gains. However, the long term fundamentals still favor stocks over bonds. For conservative investors, focus on the big blue chips who have long histories of paying and raising their dividends.
Reader Question: I am a recently retired federal law enforcement officer. My wife and I are both 58 yrs. old. I have a life-time federal pension of approximately $60,000 annually. In my Thrift Savings Plan (TSP) I have approximately $730,000 invested in the "L" Income life cycle fund. I have chosen not to take any distribution from my TSP at this time as we are meeting our current financial obligations without having to tap into our Thrift account. In your opinion should I leave my retirement savings where they are or should I choose a more liberal (diversified) investment strategy offered through the TSP? Your advice and recommendation will be most appreciated.  S.B.
Answer: First let me thank you for your service to our community and country. I suspect that your pension covers a substantial amount of your basic monthly expenses allowing you to invest a significant portion of your thrift saving plan for long-term growth. According to the government web site, the L Income Life-Cycle fund you are in is their most conservative lifestyle plan…meaning that it is heavily invested in fixed income securities. My response to the first reader’s question also applies to your situation. For you, I would carefully consider the advantage of rolling your TSP over to a discount broker such as Charles Schwab, TD Ameritrade or Vanguard. There is no cost to do this and these companies do not charge a fee to hold your money. Once there, you’ll have virtually unlimited investment options including no-load mutual funds, exchange traded funds (EFTs), stocks, bonds, CDs and money funds. If you need help creating an investment plan, these companies have specialists that can assist you or you can seek the advice of a fee-only financial advisor. To locate a fee-only advisor near you visit
Reader Question: I recently inherited a sum of money that is now sitting in my money market. I’m trying to decide whether to use the money to pay a big lump sum down on my mortgage or to fund additional retirement plan savings. Currently, I max out my savings plan at work plus I also max out a Roth IRA account. What I would do with my inherited money is max out the "catch up" allowances.  Since I am now over 50, I am eligible to do this.  I think I can contribute an extra $5,500 in "catch up" thru my work savings plan and maybe an additional amount in my Vanguard Roth account. What would you recommend? K.M.
Answer: Let me discuss the mortgage pay down strategy first. Generally I would not recommend taking a large lump sum and paying down a mortgage for several reasons:
1.       Making a lump sum payment on a traditional mortgage does not reduce the monthly payments. Instead it reduces the remaining months to pay off the loan so it does nothing to improve your monthly cash flow.
2.       By using your inheritance to pay down your mortgage, you’ve converted a liquid asset into an illiquid asset. If you have an emergency and need your cash, it may be difficult or expensive to retrieve it out of your increased home equity.
3.       You’ll, in essence, ‘earn’ on this investment the interest rate associated with your mortgage. With mortgage interest rates at historical lows, this will likely be a modest return.
I do like your idea of using the money to further fund your retirement by funding the ‘catch-up’ portion allowed under your 401-k and Roth IRA. For 2013 and 2014 you are allowed to contribute up to $17,500 in your 401-k plus an additional $5,500 catch-up if you are age 50 or older. For your Roth (or traditional IRA), the maximum contribution for 2013 and 2014 is $5,500 plus a $1,000 catch-up contribution. Note that there is an income test to qualify for Roth and traditional IRA contributions.
Correction: In last week’s column, “Winning the Credit Score Board Game”, I incorrectly stated that employers could use your credit score as part of their hiring process. While they can access an Employment Credit Report that does include your credit and payment history, it does not include your credit score.