Where should I put my $2,000 of IRA money? Into a bank plan,
a variable annuity, or a mutual fund? If you say mutual funds, how do I go about
getting reliable information?
C.S., Arlington Heights, IL
Eliminate the variable annuity because it has the expense of an insurance
contract wrapped around a mutual fund. An IRA gives you the tax deferral you
seek without the expense of the insurance "wrapper" which typically costs about
1 percent a year. Then eliminate the bank IRA because it generally offers a
lower return than comparable maturity investments.
That leaves you with mutual funds. To get reliable information, I suggest a trip
to the library where you can read Morningstar mutual funds and see them
compared. Then start with a low cost fund structured to resemble a typical
pension plan with 60 percent stocks, 40 percent bonds and use it as a benchmark
for other funds performance, risk, and cost. As a benchmark, I suggest using
Vanguard Balanced Index Fund.
Yes, it is NOT immediately obvious that one fund is better than another. And,
yes, you will not understand the language and distinctions overnight. That’s why
you start with a highly neutral, low cost fund. The minimum IRA investment for
this fund is $500 ( $3,000 for taxable accounts). You can learn more by calling
Vanguard at 800-662-7447.
I am a first time investor and I am worried about the stock market falling. Last
April I purchased 150 shares of a stock at $73.50 a share. Now, due to a stock
split, I own 300 shares at $57.75. I am single and debt free and have no rent
expense. I do not need the money for 2 to 5 years when I plan on buying a house.
Should I take my profit and run?
R.A., Cosmos, MN
A. Why did you buy the stock in the first place? Did you expect the earnings to
rise and the price to rise with it? Probably. Without commitments or an
immediate need for the money, you are in a good place to take measured risks. My
suggestion: get analysts estimates of earnings for the next year, look at the
historic Price/Earnings ratio for the company, and start to do the homework you
need to do if you are part owner of a company.
That’s what you are as a shareholder. You need to form a confident opinion about
the future of this company. If you can’t be, sell. If you can, the ups and downs
won’t bother you.
I am a 62 year old man earning $65,878 a year and plan to retire this November.
I have two retirement plan choices:
* Plan One: a monthly annuity of $4,695 plus 3/4 of one percent cost of living
adjustment of the consumer price index.
* Plan Two: A lump sum of $103,566 up front, tax free if rolled into an IRA
account., and a monthly annuity of $4,377.
I would like to know which is the best option. And where should I invest the
lump sum?
G.T., San Antonio, TX
Tax the cash in an IRA rollover account with a major fund company such as
Vanguard or Fidelity or a network such as Schwab. The reason to take the cash is
simple: the $318 monthly represents a yield of only 3.7 percent on the $103k.
You could earn very close to that in the Vanguard Balanced Index fund (
mentioned above) and your annual growth would more completely offset inflation.
In addition, the other income is an annuity which means it disappears when you
die. The lump sum could become part of your estate.
Q. I would like to retire next January and have $200,000 in my 401k plan. If I
roll the 401k into a monthly income paying IRA, will I have to pay a 10 percent
early withdrawal fee because I’m only 56 years old?
A.J., Minneapolis, MN
A. Not if you make regular, systematic withdrawals, which is what you are
planning to do. The point of the penalty is to deter people from using their
retirement fund for non-retirement purposes. You will be retiring and making
regular withdrawals from the account. No penalty. Just to make sure you do it
right, see an accountant.
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