Dear Liz: Iâ€™m 53 and a debt-free homeowner. Iâ€™m employed but donâ€™t have a 401(k) and have only about $80,000 in savings. I realize I need to put that money to work somewhere but I just freeze when it comes to trusting myself or someone else to handle it. Markets lately scare me to death, as do fraudulent or self-serving money managers. But as time ticks away, I develop more and more anxiety about it. What would you suggest?
Answer: Many worthwhile endeavors are scary, and you havenâ€™t got a moment to lose.
You donâ€™t have to make yourself an investing expert. You do need to understand enough about how the markets work that you donâ€™t panic at the first downturn and yank your money out. Consider reading a good book about investing, such as â€œInvesting for Dummiesâ€ by Eric Tyson, â€œThe Little Book of Common Sense Investingâ€ by John Bogle or â€œThe Broke Millennial Takes on Investingâ€ by Erin Lowry.
While you canâ€™t control the markets, you can control whatâ€™s much more important in the long run: how much you invest and how much you pay in fees. Try to maximize the former and minimize the latter. Consider opening an individual retirement account and contributing the maximum $7,000. (The usual limit is $6,000 per year but people 50 and over can contribute an additional $1,000.)
A discount brokerage, such as Vanguard, Fidelity, TD Ameritrade, eTrade or Charles Schwab will have low-cost target date retirement funds that do the heavy lifting for you, such as choosing investments, rebalancing and getting more conservative as your retirement date approaches.
If you still want help with investing, seek out an advisor willing to be a fiduciary, which means theyâ€™re committed to putting your best interests first.
What to do with sudden savings
Dear Liz: A few months ago we took out a jumbo loan on our residence, using the excess to pay off the mortgage on an investment property. The interest savings is substantial and our monthly payment is much less than the combined two payments we had before. We never had any problem making the two payments. Is it a good idea to put the monthly savings toward the principal? Our daughter will inherit the residence and all our income-producing properties. She has a sporadic employment history and Iâ€™m concerned she would not qualify to assume the jumbo loan if she wants to keep the residence.
Answer: Most people have better uses for their money than paying down a low-rate, potentially tax deductible debt. Your case may be one of the exceptions, or it may not.
The first step may be to ask whether sheâ€™s planning to keep the home. If she isnâ€™t, then you neednâ€™t worry about the loan â€” it will be paid off when she sells the property.
If she is planning to keep it, she could sell one or more of the other properties to pay off the loan. (These sales typically wouldnâ€™t generate much if any taxable gains, since the properties get new fair market values when she inherits them.)
If you want to avoid her having to sell anything, then making extra principal payments can be a good plan as long as you donâ€™t have any other debt and have an adequate emergency fund. You may want to consider a back-up plan in case you die before the loan is paid off, such as a term life insurance policy (assuming you can qualify).
Weighing portfolio rebalancing costs
Dear Liz: I constantly read about the need to â€œrebalanceâ€ portfolios each year or more often to make sure you have a specific distribution of stocks, bonds and cash. However, selling stocks can create capital gains that will be taxed. An advisor rebalanced my portfolio and the result for me was an increase in capital gains taxes and an increase in my Medicare premiums. The extra taxes and costs to me seem to outweigh the benefit of hitting an exact asset target. Can extra taxes and Medicare taxes be avoided while rebalancing?
Answer: Most of the advice about rebalancing is focused on people whose primary savings are in retirement accounts, where capital gains arenâ€™t taxed.
Outside of retirement accounts, the costs of rebalancing must be weighed carefully. There often are ways to minimize capital gains taxes, such as selling losing stocks to offset winners, but in many cases the rebalancing should be done slowly, over time, to manage the fallout.
If your advisor didnâ€™t discuss the tax and Medicare implications with you before taking this action, then itâ€™s time to find another advisor.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the â€œContactâ€ form at asklizweston.com.