Use windfall to boost retirement savings

Dear Liz: What would you suggest that someone do with $20,000 if the someone is closer to 40 than 30, single, with $100,000 of student loan debt and a $250,000 mortgage? My salary is around $100,000 a year. I have an emergency fund equal to six months of expenses and I make an annual IRA contribution since my employer doesn’t offer a 401(k) plan. Should I accelerate my student loan payments, since the interest isn’t tax deductible for me because my income is too high? Or should I invest instead? If I invest, should I put it all in a total market stock index fund or is that too risky?

Answer: Even if you’re making the maximum annual IRA contribution of $5,500 (people 50 and older can contribute an additional $1,000), you’re probably not saving enough for retirement. You can check the numbers using a retirement calculator (AARP offers a good one at its website, If indeed you’re coming up short, then consider opening a taxable brokerage account and earmarking it for retirement. You can use a chunk of your $20,000 windfall to get started, but also set up regular ongoing contributions.

The bulk of your retirement money should be invested in stocks, since that’s the only asset class that consistently outperforms inflation over time. If you try to play it too safe and avoid stocks, your purchasing power is likely to decline over the years instead of growing. A total market index fund with low expenses is a good bet for delivering diversification at low cost. But leaven your portfolio with bonds and cash as well, since these assets can cushion market downturns. All the returns that stocks give you in good markets won’t be much help if you panic and sell in a bad market. People who try to time the market that way often miss the subsequent rally, so they wind up selling low and buying high — not a winning way to invest.

If you don’t want to try to figure out an asset allocation, look for a low-cost target date fund. If you plan to retire in about 25 years, you’d want to look for a “Retirement 2040” fund.

Once you get your retirement savings on track, then you can start paying down that student loan debt. Target private loans first, if you have any, since they’re less flexible and have fewer consumer protections than federal student loan debt.


  1. I’d run the numbers — it’s all in the math. Paying off debt has the added advantage of avoiding paying taxes on the stock gains — and you instantly reduce your exposure to losing your job, and you reduce interest paid increasing your cash flow, or use what you were paying in interest to pay down the principal.

    Another option, if your up handling an additional workload would be to buy a rental. It’s tenants and toilets. Not sexy like stocks and bonds, but it comes with depreciation, home office deductions, appreciation, hard work, painting, taxes, insurance, paperwork, IRS form 1065×2 and CA form 565×2 and the cost to do them, replacing toilets, fixing things, and expenses (last year we had some terrible tenants) — but math wise, it can be a healthy 3rd leg of your retirement if you can get them paid off before retirement.

    Social Security + stocks and bonds (properly diversified in a cheap index fund) + rental real estate + well paying job – frugal living = a solid well-rounded solution. Avoid placing all of your eggs in one basket.

    The personal finance folks (and we have some of our own expensive ones in a big pretty office in SF) in my experience do what they’ve been taught. Consider this, your doctor learns drug interactions, and what drugs solve what sicknesses. And, they are constantly hearing about drugs, drugs, drugs (my son in-law represents big pharma BTW) when the sales guys visit the doctors office (visit your doctor around lunch time) — so guess what, that’s what they peddle. Same goes for PF — they are taught stocks, bonds, insurance, retirement plans and taxes. So that’s what they sell. I’m not knocking it at all. We’ve got about $750k in stocks and bonds, but that can’t be your only focus.

    I’m not saying at all RE is easy. It’s not. I’m not saying is cheap, because one bad tenant can easily cost you $10k. But, if you are willing and capable of solving ‘house’ problems, then it’s an option. The math worked well for us. In fact, in our last PF meeting our “10-house, rotating cash-out refinance” option ran away with the show. It can be expensive, but the math is working for us — in the long, long, long run. And, that’s exactly the issue your planning. A long, long, long life.

    I’d recommend searching the internet for good books on financial topics, a little personal knowledge goes a long way to make sure you’re not being cheated (higher/hidden fees, lower than benchmark/index returns, higher taxes, fees (again), doing something wrong in ownership, insurance, liability, qualified retirement accounts, real estate, stocks & bonds…. every bloody move you make on a daily basis (especially) and when you make those big choices now you have the information to leverage your new-found knowledge. Get a personal ‘everything’ internet-based education (should have been required in college).

    Sorry for the RE bent, it’s been a long day.

    Good luck!