Dear Liz: I have a lot of credit card debt and am just able to make minimum payments. I feel like after doing this for four years now that I am not getting ahead. I will be 61 this summer and don't have much saved for retirement. My rent keeps going up along with other expenses. I have an 11-year-old car that is in need of maintenance but don't have the funds to do it. My question is, what would happen if I walk away from the credit card debt? Will I be facing garnishment?
Answer: Yes, you could be sued and face wage garnishment if you simply stopped paying your debts.
You could consider a debt management plan offered through a credit counselor, which could lower the interest rates you pay. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org. But you'd be making payments for the next five years or so, when you could be putting that cash toward your retirement.
A Chapter 7 bankruptcy, by contrast, would take a few months and legally erase your credit card debt to give you a fresh start. Bankruptcy is often the best of bad options when you can't make progress on your debts. Consider meeting with both a credit counselor and a bankruptcy attorney so you understand all your options.
Parking money for a short term
Dear Liz: We will soon be selling our home and moving into an apartment until we purchase a new home. Our proceeds from the sale will be over $600,000. It seems that there is no place to safely put the funds and get some meaningful interest to boot. Savings accounts and money markets pay very little interest, and certificates of deposit have a fixed time. We may need to withdraw the money in as few as 30 days, but it may be six months or longer. Any suggestions where to park our money?
A rate of 1% isn't much and means that you'll lose a little ground to inflation, which is currently more than 2%. But it's more important that your money be safe and liquid, ready when you need it, than for you to try to squeeze a high return from it.
Professional investment management fees
Dear Liz: I have an IRA with over $100,000 at a discount brokerage. I had it in a target date fund. Due to market downturns, I got nervous and was convinced to put my investment into the brokerage's portfolio advisory services with additional fees coming to $1,600 per year. In general, is it wise to change investments to these more professional services?
Answer: If professional management keeps you from bailing out of your investments when markets decline, then paying a higher fee may be justified. But the higher the fees you pay, the less money you can accumulate. For example, your IRA could grow to more than $600,000 over 30 years if you net a 6% return. If your fees are one percentage point higher, and you net just 5%, you'd end up with less than $450,000.
Some discount brokers, including Schwab, Fidelity and Vanguard, now offer a low-cost "robo" option that invests your money using computer algorithms. These robo options don't offer the highly customized investment portfolios that some other services provide, but they come at a much lower cost — typically 0.3% to 0.4%. A few, including Vanguard and Betterment, offer access to financial advisors.
Annuities have indirect costs
Dear Liz: Thank for your right-on reply to the reader who claimed that fixed and indexed annuities were available at no cost to investors. I am so tired of hearing from agents and investors that their annuity is great and does not have fees!
Answer: Insurance companies aren't charities providing investments at no cost. They're businesses that have to keep the lights on and pay the people who sell their products. With fixed and indexed annuities, the cost is built into the interest rate spread, which is the difference between what the insurer earns on your money and what it pays into your account. The investor pays an indirect cost, rather than a direct cost that's explicitly disclosed.