Investing can be scary. How to overcome your anxiety
Dear Liz: I’m 53 and a debt-free homeowner. I’m employed but don’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 haven’t got a moment to lose.
You don’t have to make yourself an investing expert. You do need to understand enough about how the markets work that you don’t panic at the first downturn and yank your money out. Consider reading a good book about investing, such as “Investing for Dummies” by Eric Tyson, “The Little Book of Common Sense Investing” by John Bogle or “The Broke Millennial Takes On Investing” by Erin Lowry.
While you can’t control the markets, you can control what’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 older 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 they’re committed to putting your best interests first.
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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 I’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 she’s planning to keep the home. If she isn’t, then you needn’t worry about the loan — 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 wouldn’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 don’t have any other debt and have an adequate emergency fund. You may want to consider a backup plan in case you die before the loan is paid off, such as a term life insurance policy (assuming you can qualify).
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Weighing portfolio rebalancing costs
Dear Liz: I constantly read about the need to “rebalance” 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 costs 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 aren’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 didn’t discuss the tax and Medicare implications with you before taking this action, then it’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 “Contact” form at asklizweston.com.