Ask Liz Weston

Get smart with your money

Investing

Thursday’s need-to-know money news

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Credit card backgroundHidden credit card charges, moving on from Grandpa’s investment strategy, and why everyone should plan to retire early.

Hidden Credit Card Charges: Are You At Risk?
Be on the lookout for “grey charges”.

How to Improve Your Credit History
Credit mistakes don’t have to follow you forever.

Four Ways Not to Invest Like Your Grandfather
An ever-changing economy may require a different portfolio strategy.

Why Everyone Should Aspire to Early Retirement
How planning ahead for retirement keeps you financially focused

10 Dumb Things You Do With Credit Cards
Small mistakes could have big consequences.

“Permanent” employment? No such animal

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Dear Liz: My spouse has tenure at a university. Given that one of us will always be employed, should we change the way we look at the amount of money we keep in an emergency fund or our risk tolerance for investments?

Answer: Even tenured professors can get fired or laid off. Tenure was designed to protect academic freedom, but professors can lose their jobs because of serious misconduct, incompetence or economic cutbacks, such as when a department is eliminated or a whole university is closed. About 2% of tenured faculty are dismissed in a typical year, according to the National Education Assn.’s Higher Education Department.

That’s more job security than in most occupations, of course. Your spouse also may have access to a defined benefit pension, which would give him or her a guaranteed income stream in retirement. Those factors mean you reasonably can take more risk with your other investments.

As for your emergency fund, you may be fine with savings equal to three months of expenses. But consider that if your spouse were to be dismissed, he or she probably would have a tough time finding an equivalent position. If the institution starts having financial difficulties or if there is any reason to suspect that he or she could be dismissed, a fatter fund could come in handy.

High, safe returns don’t exist

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Dear Liz: I’m getting about $500,000 from the sale of my business this year and next year will be getting an additional $1 million. What’s the best way to invest the money so I can make $150,000 to $200,000 a year? I am 55 years old and will have no other income than what I can earn with this money.

Answer: You probably know that “guaranteed” or “safe” returns are very low right now. If you’re getting much more than 1% annually, you’re having to take some risk of loss. The higher the potential returns, the greater the risk.

So even if you could find an investment that promised to return 10% to 13% a year, there are no guarantees such returns would last, plus you would be at risk of losing some or all of your investment. A down draft in the market or an extended vacancy in your real estate holdings could cause you to dig into your principal.

That’s why financial planners typically advise their clients not to expect to take more than 4% a year or so out of their portfolios if they expect those portfolios to last. If you try to take much more out or invest aggressively to earn more, you run a substantial risk of running out of money before you run out of breath.

Playing it safe could mean losing money

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Dear Liz: The certificate of deposit I owned in my Roth IRA recently matured. I’ve put the money into a Roth passbook account until I can figure out what to do with it. I’m a public school teacher and have a 457 deferred compensation plan to which I contribute monthly. I am 57 and will need to work until I am at least 65. What should I do with the money in my Roth?

Answer: As a public school teacher, you probably have a defined benefit pension that will give you a guaranteed monthly check for life once you retire. Depending on how long you’ve taught and where, this pension could cover a substantial portion of your living expenses.

The guaranteed nature of this pension means that you may be able to take more risk with your other investments. That would mean your Roth could be invested in stock mutual funds or exchange-traded funds that offer potential for growth. CDs and other “safe” investments can’t offer that — in fact, your money loses purchasing power since you’re not earning enough interest to even offset inflation.

Since you’re so close to retirement, you should invest a few hundred dollars in a session with a fee-only financial planner who can review your situation and offer personalized advice.

About to retire? Get some help

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Dear Liz: I am approaching being able to retire in three years at 56, but I’m really concerned with the current market conditions. I have around $320,000 in 401(k) and 457 accounts now, all of it invested in stocks. Should I scale this back to more moderate allocations? My pension will pay me around $5,200 a month, so I do not anticipate needing to withdraw from my investments before age 59.

Answer: Even if you’ve been a die-hard do-it-yourself investor until now, it’s time to get help. Retirement decisions can be incredibly complicated, and you may not have time to recover from mistakes.

A fee-only financial planner would ask, among other things, what your current living costs are and what additional expenses you expect, such as buying another car, taking trips and so on. Those details can help determine whether your savings are adequate. The planner also would ask you how you plan to pay for healthcare in retirement, since Medicare doesn’t kick in until age 65, and an individual policy at your age could eat into that pension check. Even with Medicare, Fidelity Investments estimates, a 65-year-old couple retiring this year would need $240,000 to cover medical expenses throughout retirement — not counting any money they might need to pay for nursing home or other custodial care.

What a planner probably wouldn’t do is approve having 100% of your investments in stock at any age, even with a nice pension. You may have time to ride out another market downturn, but watching half of your life savings disappear might increase the chances you’d sell out in a panic. Having a more moderate allocation that includes bonds and cash could help cushion those market swings and keep you invested.

You can get referrals to fee-only planners who charge by the hour at the Garrett Planning Network, http://www.garrettplanningnetwork.com. If you’re looking for fee-only planners who charge a retainer or a percentage of assets, you’ll find those at the National Assn. of Personal Financial Advisors, http://www.napfa.org. NAPFA has tools for consumers at http://www.napfa.org/consumer/Resources.asp and the Financial Planning Assn. has tips on choosing a financial planner at http://www.fpanet.org/FindaPlanner/ChoosingaPlanner/.

High fees can break your nest egg

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Dear Liz: We have $130,000 invested in mutual funds, but the returns the last few years have been less than 4%. With the financial advisor taking 2% as a fee annually, we are not satisfied with the growth. A co-worker suggested buying blue-chip stocks with a strategy to hold and reinvest the dividends. If this is done in a self-directed plan to avoid the fees, we could be netting 4% plus. Is this a good plan or should we trust the advisor’s optimism that our returns will improve soon?

Answer: You don’t mention your age, your investment mix or your goals for this money. But if your portfolio isn’t doing significantly better this year — after all, the Standard & Poor’s 500 stock market benchmark is up about 30% over the last 12 months — you have cause for concern.

Even if your returns were better, a 2% fee is pretty high. Small investors need to keep an eagle eye on costs, since expenses can have a huge effect on your nest egg. Paying even 1% too much could shave more than $100,000 off your returns over the next 20 years.

That doesn’t mean, however, that an all-stock portfolio is a better choice. Individual stocks typically are much riskier than a diversified portfolio of mutual funds or exchange-traded funds (ETFs).

What might make more sense is consulting a fee-only financial planner who can design a low-cost portfolio for you. You can get referrals to planners who charge by the hour at http://www.garrettplanningnetwork.com.