Saving for retirement must involve some risk
Dear Liz: I just started saving for retirement through my job’s 401(k) plan. I’ve been putting aside $400 a month. I just checked my account to see how it was doing. It has lost over $600! I am trying to save for my retirement — not lose. Where should I invest? I’m considering getting a financial planner to help me.
Answer: The most important thing you need to know about investing is that there is no such thing as a truly risk-free investment.
You won’t lose your principal if you invest in “safe” investments, such as Treasuries and FDIC-insured bank accounts. But you won’t earn enough to keep ahead of inflation. Basically, you’ll never be able to save enough to retire, since the purchasing power of your funds will erode over time rather than grow.
To stay ahead of inflation, you need to take more risk. Stocks over time have consistently offered returns that beat inflation. In every 30-year period starting in 1928, stocks have returned average annual returns of at least 8%. But they certainly don’t gain that much every year, and some years you’ll face steep losses. When you invest in stocks, you have to be prepared for volatility. In other words, sometimes your investments will lose money.
You can reduce that volatility somewhat by diversifying your stock investments (some small companies, some large; some U.S. companies, some foreign) and by including a diversified mix of bonds in your portfolio, along with cash.
A fee-only financial planner can help you design an investment plan that makes sense for your situation. Or you can consider opting for the “lifestyle” or “target date retirement” funds offered by your plan, since they do the diversification and rebalancing for you.
It’s smart to have a second credit card
Dear Liz: I recently applied to refinance my mortgage. The lender sent me a copy of my credit reports and scores. My FICO scores from all three credit reporting agencies were OK, just a little under 800, but under the heading “Key Factors affecting credit score” was the following statement: “Proportion of balance to credit limits too high on revolving accounts.” I have only one credit card, which I’ve had more than 20 years. (Several department store credit cards were closed, with no balance, many years ago.) I never exceed 10% of my limit, and on the date the report was issued, my balance was 7%. You frequently advise borrowers to limit credit card charges to a small fraction of their limit to help their score. How can 7% be considered too high? Is it possible there is an error somewhere and I should investigate?
Answer: If your FICO scores are close to 800, they’re more than OK — they’re excellent. And once scores are that high, the reasons the credit bureaus give you for why they’re not higher are pretty much irrelevant. Even if you could fix the purported problem, it probably wouldn’t affect your numbers that much.
But you should consider adding another credit card once your refinance closes. A second card could serve as a backup if your primary card ever gets temporarily shut because of fraud. A second card also gives you somewhere to go if your issuer raises your rate, cuts your credit limit or starts imposing unreasonable fees. It’s not smart in today’s financial environment to be beholden to a single credit card issuer.
Time share proves burdensome
Dear Liz: I have tried to sell my time share on different occasions. If I stop paying my assessments and taxes because I do not wish to use my time share any more, will that be detrimental to my credit?
Answer: Typically, your delinquent account will be turned over to a collection agency. Not only will your credit scores take a hit, but you may be subject to nasty collection calls as well.
If your time share is paid for, you might consider giving it away. Some people have successfully gotten rid of time shares by listing them for $1 or so on Craigslist or eBay.
If you still owe money on the loan you used to buy the time share, though, giving it away is probably not an option unless you’re able to pay off the loan first.
Liz Weston is the author of “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via https://www.asklizweston.com. Distributed by No More Red Inc.
