Welcome to October's Jump-Start your Financial Plan with NAPFA Q&A! We'll get underway at 1:00 p.m. EST, so get those questions ready!
Thank you for joining us for another installment of Jump-Start Your Financial Plan with NAPFA. Today we have Lea Ann Knight, Therese Govern, Tim Voegele, Jamie Milne, Delia Fernandez and Anna Sergunina on hand to take your questions.
Let's dive right in. Here's our first question:
Hi Nashville. That's really an apples and oranges comparison. Paying off a mortgage nets you a guaranteed, fixed rate of return -- the mortgage rate. Investing in the stock market has the potential for higher returns, for sure, but with very little certainty. Apple/orange. The right answer for you depends on your stage of life, your attitude towards debt, your time horizon for spending from your nest egg. etc.
Nashville, I also would need to know about your life situations before giving a thoughtful answer. Stage of life, other debt, other investments, goals,etc. Can you tell us more?
Therese has good points, the answer is it depends. But do favor having a mortgage in most stages of life -- not that many of my retired clients do, but some do. Current interest rates are cheap and assuming some inflation will be paid back in inflated dollars. If by chance you do not have other investments, I certainly favor investing versus having the house paid. It's hard to sell a bedroom when you need money.
Looks like Nashville may have stepped away. Let's start another in the meantime:
Ah. There you are Nashville :)
10% of your pay into TSP is great. Also remember you have an option to contribute to Roth TSP.
I would suggest you consider Lifestyle funds (which are diversified
as compared to just picking certain stocks.)
Thanks Nashville. So it boils down to 1) do you want to get a guaranteed return by paying off the mortgage and being debt free or 2) do you believe you can achieve a return on other investments in excess of the interest rate on your mortgage. I normally recommend that people try to become debt-free as early in life as possible since it relieves of the burden of paying someone else for the use of their money and open up other possibilities. Would still recommend you meet with a fee-only advisor to go over this in detail.
Hi Missmaryc, Great job, you are obviously are a saver. I think anyone can benefit from a planner so there is no need to have a certain amount of money, though look for those that charge hourly or may have a set/flat planning fee. I will not comment on the individual stocks you suggest, but your strategy seem okay. I like dividend stocks, but prefer to not focus all investing in dividend paying stocks (you are not with your TSP) and though it's fund to pick winners and losers for individual stocks, I like ETF or Mutual funds. Dividend reinvesting is great.
Hi Miss Mary. You're doing great saving 10% of your pay! Don't look back, look forward. At this point in your life, saving year-in year-out is the most important thing you can do for your long term financial health. You may have to ratchet up that savings rate over time, but 10% is a great start (especially if your employer is also saving for you). I do like Roth IRAs for people your age, and I think investing in stocks in a Roth makes sense (putting your highest earning asset in the best tax-deferred vehicle). Like Anna, though, I would recommend a diversified basket of stocks.
Here's a question from Rich:
JBer, Jdm, Dennis and Donna, you guys are on deck!
Rich from Utah, Do you know what the pension will pay you in Feb 2014?
Miss MaryC, I usually recommend that young people such as yourself 1) set the max aside in a Roth and invest it aggressively and then try to max out their tax-deferred plans if at all possible. If you do this, and adjust your life style to living on the net pay, you will likely have a happy retirement possibly in your fifties!
Your Roth IRA should be invested the most aggressively, to take advantage of time for growth & compounding as well as tax benefits in the future. Think about researching index funds (which have low fees, just like your TSP funds).
Rich from Utah: I see your point; it's difficult to find immediate annuities attractive in today's interest rate environment and at your age, which is only 64/65. $14k is not a huge percentage of your invested assets, and if you feel the annuity the employer offers is not any better than what you can buy on the outside, then go ahead and roll it over. Sometimes, however, corporate pensions have much better payouts than what can be purchased retail, so I'm glad you did some comparisons first.
Rich, Tim here....how are you currently generating income in retirement? Soc Soc, other pension, 401 k withdrawals,etc? I see your idea of growing the nest egg before purchase of an immediate annuity, but at what risk? Do you need the income or can you risk annuitizing at a later date even if the balance is lower?
Rich from Utah, there are times people will say they have a balance in the pension plan and the actual balance is very different than the pension monthly payments. It would appear that your $14k will purchase the same payments inside and outside the pension plan. If you have not other monthly income coming in, I do like guaranteed monthly payments at least to a point. But like Delia, I'd roll it over, you have a shot at doing much better.
Rich from Utah, Jamie Milne made a really good point about making sure you know what the balance is in the pension plan before making that decision.
We have a follow up from missmaryc below
missmaryc, since the Roth IRA will be tax-free, you always want to max that our first; then try if you can to max out other tax-deferred opportunities.
Rich, also be sure if you roll it and play the waiting game that you have the funds very conservatively invested. Otherwise, you could end up with less than $14K when you're ready to purchase the annuity!
Missmarryc, contribute first 5% to regular TSP to get the match (since it's free money) and then if your cashflow allows you can
contribute the rest to Roth TSP.
Rich, sounds like you are okay on cash flow for living expenses since you are deferring SocSec til 70 so yes, it sounds like you could risk taking the lump-sum and work to build it up til you annuitize.
Miss Mary I believe the TSP will calculate its match on the entire amount you save, whether you do it on the regular or Roth side of the plan, or a bit of both. The employer contribution, though, will go entirely on the regular side, I believe. Best to check with your plan administrator.
HI Jdm. I am a big believer in getting that emergency fund in place first. Too often, people pay off low interest rate debt at the sacrifice of savings and then turn around and have to put an "emergency" on a higher rate credit card. Get your cushion in place, keep making the payments on the loans and then try to accelerate the pay off of the loans.
Jdm, what percentage of your gross income is PITI? In other words, what other discretionary income do you have to pay off debt besides that bonus?