Ask Liz Weston

Dear Liz: You suggest that wealth can be accumulated by regular savings and earning an average rate of return of 8%. Where can a safe 8% return be found?

Answer: The same place leprechauns hide their gold.

There is no truly “safe” investment. Investments that have no risk of principal loss, such as federally-insured bank accounts, typically offer such low returns that they expose you to “inflation risk” — in other words, your deposit’s buying power is eroded over time.

If you want to stay ahead of inflation over the long run, you need some exposure to the stock market because that’s the only investment class that’s consistently outperformed inflation over time. According to Ibbotson Associates, the stock market has returned at least 8% on average annually in every 30-year period, starting in 1928. So even if you invested on the eve of the Great Depression, you could have knocked out an 8% return if you just hung on long enough.

Dear Liz: I’m doing all the right things: accumulating an emergency fund, contributing to retirement funds and paying down the mortgage. I currently save about $12,000 of my $90,000 annual salary. Beyond this, how do I take the right steps to large wealth accumulation, as in $3 million to $5 million?

Answer: You’re already on your way. If you bump up your retirement contributions by at least the rate of inflation each year and earn an 8% average annual return over time, you should hit $3 million in about 35 years.

If you want to accumulate your fortune faster, you should save more, achieve a better-than-average investment return, or both.

If you’re serious about accumulating wealth, get a copy of “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko. The authors outline how people really get rich in the U.S.: by living well below their means and making saving and investing a priority. Many of them also have their own businesses. The risk of failure for small businesses is high, but those who succeed keep more of the upside than those who work for someone else.

Stanley and Danko repeatedly make the point that the millionaires they studied were more interested in building wealth than in displaying high-status trappings. They tend not to drive fancy cars, wear expensive watches or spend a fortune on clothes. In his most recent book, “Stop Acting Rich,” Stanley makes the point that millionaires also tend to spend modestly on homes: Few have more than one, and most choose houses and neighborhoods that are easily affordable, rather than a strain on their finances.

These books can provide you a road map for your own path to wealth and provide inspiration for the journey.

Dear Liz: If I’m given a 10-day grace period for making a payment and pay the bill on the last day of the grace period, will it still be treated as an on-time payment on my credit reports?

Answer: Typically, yes. In fact, most creditors won’t report you to the credit bureaus as overdue until your payment is 30 days or more overdue.

That’s not to say you should treat due dates casually. Missing the due date (or the end of the grace period, if that’s different) will typically trigger a late fee and could lead to higher interest rates.

You would be smart to make sure your payment reaches your creditor a day or two before the end of the grace period. Using electronic payments rather than the mail can help you time your transactions more precisely. Online or automatic payments also leave an electronic trail that can prove when you paid.

Dear Liz: Our apartment was infested with bugs, had a leaky bathroom faucet that was never fixed after numerous requests, and then our ceiling fell in because of a roof leak that was not repaired. We had to make other living arrangements before vacating the apartment, and now they are saying we’re responsible for $1,800 for terminating our lease early.

Answer: In every state except Arkansas, the law requires landlords to provide “fit and habitable” housing, said attorney Janet Portman, the managing editor of legal self-help publisher Nolo and author of “Every Tenant’s Legal Guide.” “Fit and habitable” typically means the housing is waterproof and free from vermin infestation. The housing also must have heat, lights, water, functional plumbing and a working kitchen.

If the housing isn’t fit and habitable, you legally can break the lease if you didn’t cause the problem yourself and you gave the landlord a reasonable amount of time to fix the problems.

Fixed means fixed, by the way; you can break the lease if your apartment is still infested, even if the landlord has treated the infestation repeatedly, Portman said. You can consult Portman’s book and a local tenants’ rights organization for more information.

Dear Liz: I have a brother-in-law who has a very hard time finding employment because he has frequent seizures. He is 59 and needs about $40,000 a year for living expenses, including high health insurance premiums because of his condition. Thanks to a recent inheritance and some good investing when he was younger, he has about $1.3 million in assets. However, he has little chance for further meaningful employment, so he needs to live off of his investments. What is the best way for him to stretch his assets? Would a fixed annuity be a wise thing for him to invest in? Would a mix of an annuity and regular investments be a better bet? Or should he look at just a mix of fixed income and equity investments?

Answer: Any of those options could work, or could be a disaster, depending on the details of his financial situation.

A fixed annuity, for example, could give him a monthly check for life, with inflation adjustments if he chose, but he would have to commit a big chunk of his available funds to get the kind of return he needs. He also would be buying the annuity when interest rates are quite low, which means he would get a smaller payment than if he bought when rates were higher.

Investing outside an annuity would give him more flexibility, but no guarantee he’d get the kinds of returns he would need to last him for life.

His best bet is to consult with a fee-only financial planner who can review his options and suggest the best course for him. He can get referrals to fee-only planners from the National Assn. of Personal Financial Advisors at www.napfa.org or to fee-only planners who charge by the hour from Garrett Planning Network at www.garrettplanningnetwork.com.

Dear Liz: Your recent advice about investing an inheritance prudently is all good. However, I think most people waste unexpected money, spending it in dribs and drabs with not much to show for it. So, to your advice, I would add this:

Take a minor portion of the inheritance and spend it on some indulgence you would never have done otherwise. About 15 years ago, I used about 20% of a sizable inheritance to take my family, including kids, spouses and grandkids, on a three-week African safari. The result? We all have wonderful memories of a trip in which family members bonded closely with one another, and of once-in-a-lifetime sights and experiences.

The rest I invested, spent on college tuition and used for retirement. I can’t account for it all, but I have no regrets about that Africa vacation.

Answer: Your advice is terrific. It’s important to enjoy our windfalls and even more important to invest in experiences and memories that last. Your family is lucky to have you.

Dear Liz: Since tax filing season is upon us, it’s a good time to get rid of statements and records we don’t need. How long should we keep such things as tax records, credit card statements, mortgage payment statements, utility bills, etc?

Answer: Most tax-related documents should be kept for seven years unless the paperwork concerns a potentially taxable investment or asset, such as your home or stocks bought outside a retirement account. In that case, keep the paperwork as long as you own the investment or asset, plus seven years.

For example, hang on to the paperwork created when you bought your home, such as sales contracts, deeds, mortgage paperwork, appraisals and surveys, as well as the costs of any home improvements, since they can help reduce any potential tax bill when you sell. You can dispose of all this documentation seven years after you sell the property.

Why seven years? Your greatest risk of audit is in the first three years after you file your return, but you can still be audited up to six years later if you substantially underreport your income. Since we file our returns in the following year — last year’s returns are due in April of this year, for example — adding seven years to the tax return year will give you the year that you can toss your return’s documentation. This year, for example, you can toss tax-related documents filed for the 2002 tax year.

You might want to hang on to the actual return, though. They typically don’t take up much room and may come in handy. One reader who discovered errors in her Social Security statements, for example, was able to get those corrected because she still had the tax returns for those years.

If it’s not tax-related, your holding times vary. You typically can ditch credit card statements and utility bills after a year, for example. Old insurance policies can be shredded after they’ve lapsed or been replaced, and there’s no chance you’ll file a claim against them.

You can dispose of your pay stubs after comparing them with your annual W-2 form. (Keep your year-end pay stub too, if it shows information that’s not on your W-2, such as tax-deductible union dues.)

Many people these days simply scan all their paperwork into their computers and discard the originals. The actual paper isn’t as important as the information on it, and most sources — including the IRS — accept electronic documents.

Just make sure to back up regularly and keep those backups in a safe place somewhere off site. A secure website or a safe deposit box are two options.

I’m always on the alert for great new rewards cards, and there’s one that might be a great fit if you spend time at Hilton-chain hotels.

The Hilton HHonors Surpass Card, just launched from American Express, offers all the bennies of the existing Hilton HHonors card, plus a few, including:

• 9 points (triple bonus points) for every eligible $1 spent at Hilton Family hotels, 6 points for every $1 spent at supermarkets, drug stores or gas stations and on phone, TV and Internet service, plus 3 points for every $1 spent elsewhere
• complimentary standard membership in Priority Passâ„¢,  which gives you access to more than 500 airport lounges worldwide
• automatic Diamond VIP status with an annual spend of $40,000 (Diamond status gives you automatic upgrades, access to executive floor lounges, free breakfast in some locations and a 50% bonus on all HHonors Base points earned

Savvy travelers have long since figured out that hotel cards often offer a better deal than airline cards. It’s typically easier to earn and use points; plus you often get more bang for your buck, since your hotel bill can often dwarf your airfare.

You have to travel enough to justify the $75 fee (although a couple stays in an airport lounge would do that). If you’re not a big traveler, Curtis Arnold at CardRatings.com points out that Schwab and Fidelity have both launched premium cards with an excellent 2% redemption rate (payable into your investment accounts there). Thanks, Curtis!

Dear Liz: On several occasions you’ve referred to the possibility of getting 8% annual returns on investments. Pray tell us where you can get this much. The best I can find is about 5%.

Answer: That’s because you’re looking at relatively low-risk options such as certificates of deposit where the return is guaranteed. If you’re willing to take more risk, you should be able to attain 8% average annual returns over the long term by investing in a diversified mix of stocks, bonds and cash. Large-company stocks have averaged 10.4% annually for the last 80 years, according to research firm Ibbotson Associates, while small-company stocks have averaged 12.6% in the same period.

Obviously, investing in stocks means you risk significant losses in some years, but if your time horizon is 20 years or more, you should still come out ahead.

Dear Liz: After 25 years as a homemaker and mother, I was divorced. I had to find work, create an income and begin life over. I am now 65 and in very good health, with loving children and a small business. But I am in debt and have no savings for the future. I awake each day to find I have more debt. It’s not healthy debt that I could handle, but over-the-top debt that I will never be able to repay. I acknowledge that I have a Cinderella princess mentality, thinking a prince will come along to rescue me, and that I’ve lived an upper-middle-class lifestyle that’s beyond my means. I have done my emotional work in overcoming the idea that I’m a victim and thus not responsible for my situation. But I still can’t act. My children do not know of my immediate disaster nor do my clients. I feel frozen and unable to reconcile myself to the inevitable, disrupting their lives and their image of me. What now?

Answer: You act.

Emotional work is all fine and good, but it’s pretty useless if you’re not using your insights to change the way you behave.

And, as you intimated, you’re behaving like a child. Children can believe in fairy tales and last-minute rescues, but grown-ups take charge of their own lives.

This won’t be fun. If you truly can’t repay this debt, you may end up filing bankruptcy or negotiating settlements with your creditors. You may have to move and live a more basic lifestyle.

But every day you delay, you’re adding to the pile of debt you owe. And you already have two things–good health and loving kids–that many rich people would trade their fortunes to achieve. Keep that in mind in the coming difficult days.