Retirement

Windfall in your 50s? Don’t blow it

March 26, 2012 By Liz Weston

Dear Liz: I am 56 and will be receiving $175,000 from the sale of a home I inherited. I do not know what to do with this money. I have been underemployed or unemployed for six years, have no retirement savings and am terrified this money will get chipped away for day-to-day expenses so that I’ll have nothing to show for it. Should I invest? If so, what is relatively safe? Should I try to buy another house as an investment?

Answer: You’re right to worry about wasting this windfall, because that’s what often happens. A few thousand dollars here, a few thousand dollars there, and suddenly what once seemed like a vast amount of money is gone.

First, you need to talk to a tax pro to make sure there won’t be a tax bill from your home sale. Then you need to use a small portion of your inheritance to hire a fee-only financial planner who can review your situation and suggest some options. You can get referrals for fee-only planners who charge by the hour from the Garrett Planning Network at http://www.garrettplanningnetwork.com.

You’re closing in quickly on retirement age, and you should know that typically Social Security doesn’t pay much. The average check is around $1,000 a month. This windfall can’t make up for all the years you didn’t save, but it could help you live a little better in retirement if properly invested.

You should read a good book on investing, such as Kathy Kristof’s “Investing 101,” so you can better understand the relationship between risk and reward. It’s understandable that you want to keep your money safe, but investments that promise no loss of principal don’t yield very much. In other words, keeping your money safe means it won’t be able to grow, which in turn means your buying power will be eroded over time.

Retire in style: What you need to know

March 21, 2012 By Liz Weston

Reuters has a nice package of retirement stories that are worth checking out:

Ecuador seen as new retirement hot spot
I mentioned Ecuador in my column “Retire overseas on $1,200 a month,” and now it’s been named a top spot for bargain-seeking retirees, according to International Living magazine’s 2012 Global Retirement Index.

What retirees wish they’d done differently
Reuters asked several retirees what they would tell their 40-year-old selves if they could go back in time. Interestingly, the answers aren’t all about money–they’re about quality of life. (A great book on this topic is Ralph Warner’s “Get a Life: You Don’t Need $1 Million to Retire Well.”)

H ow low must retirement withdrawals go?
Linda Stern tackles the tricky math of how much you can afford to take from your retirement savings to have a reasonable chance of making your money last as long as you do.

G rowing numbers work into retirement
I’ve written about “When only one of you can retire” and the huge numbers of people forced into early retirement by layoffs, but this article picks up the flip side: people who keep working because they want to. If that’s you, you might also want to read “Retire without quitting your job.”

Is an annuity in your future?
One solution to the risk of outliving your money is the income annuity (also known as the fixed annuity). Learn more about it here.

When to start tapping Social Security
Some people have little choice but to take Social Security benefits early. But if you can wait, you probably should.

Use windfall to pay down debt, boost savings

March 5, 2012 By Liz Weston

Dear Liz: I am closing a business deal that will net me just under $1 million. I have an interest-only loan on my home, two car loans and credit-card debt. My plan was to “clear the plate” and pay everything off, leaving me about $175,000. I am not worried about getting into further debt, as my wife and I are pretty grounded, but I wonder if I should be giving up the tax break of a mortgage. My wife and I make a fair income, so we will need advice on investment options as well.

Answer: You say you and your wife are “pretty grounded,” yet you carry a huge amount of debt, including a ticking time bomb of a mortgage.

Interest-only loans were quite fashionable in the boom years but make little sense for most people. That’s because the low initial payments ultimately reset much higher, as the interest-only period ends and the borrower must begin repaying principle.

Carrying credit-card debt is foolish as well, and a sign that you’re living beyond your apparently quite comfortable means.

Furthermore, you don’t say anything about your assets — whether you’re on track saving for retirement or if you have an adequate emergency fund. That would make a difference in how you should deploy this windfall. If your savings are inadequate, it would make sense to invest a good chunk of this money, even if it meant continuing to carry a mortgage. If you must have a home loan, though, it should be a traditional, fixed-rate version to avoid future payment shock.

The big danger is that you’ll pay off what you owe now, only to wind up deeper in debt in a few years because you haven’t changed your approach to money. Use some of your windfall to hire a fee-only (not fee-based) financial planner to review your situation. You can get referrals from the National Assn. of Personal Financial Advisors (www.napfa.org).