Saturday, February 16, 2002

Questions reflect bear-market qualms


Readers look for safest investments, smartest moves

By Amy Higgins
The Cincinnati Enquirer

        Greater Cincinnatians are full of questions: Questions about retirement, college savings, safe places for investments.

        Last week, we invited Enquirer readers to get their personal finance questions answered free by financial professionals. Members of the Financial Planning Association took phone calls, chatted online and met face-to-face with readers. Over the two days of the Ask the Adviser sessions, the planners answered more than 75 questions ranging from how to start saving to how to take account distributions.

        Most of the questions reflected a fear of stocks given the 2-year-old bear market. Here are some of the most frequently asked questions — and how the professional answered:

        • Should I take money from my 401(k) to pay off my house?

        The answer depends on your situation — but it's hardly ever a good idea, said Christine Carleton, an investment adviser at The Asset Advisory Group. Even if you are allowed to make withdrawals from your 401(k) while under 59 1/2 and still employed, you would be levied taxes plus a 10 percent penalty.

        If you're looking to reduce your monthly mortgage obligation in these uncertain economic times, consider refinancing your mortgage instead of paying it off.

        • Should I continue putting 401(k) contributions into stock funds or switch into bond funds?

        It depends on your individual situation, certified financial planner Jack Gambetta said. It especially depends on how risky you want to be and for how long.

        But also keep in mind that you might want to be positioned for a stock price recovery, Mr. Gambetta said.

        “It seems that we are seeing signs of the end of recession, and historically bear-market recessions are followed by periods of recovery, which would bode well for stock funds.”

        • Should I move out of bonds into more aggressive funds, like a technology-oriented fund or an index fund?

        It still depends on time and tolerance for risk, said Paul Bergman, a certified financial planner with American Express Financial Advisors. Mr. Bergman said that there is a possibility for growth later this year but that people should stay diversified no matter the economic climate.

        • At 50 years old, I was recently laid off and have a 401(k) heavy in employer stock. What should I do with it?

        Options include either keeping the money in a 401(k) and then rolling it to another 401(k) when you get a new job, or rolling the money into an IRA now. There are pros and cons in either case, said Jeff Daniher, certified financial planner with Ritter Daniher Financial Advisory.

        “It probably makes sense to diversify away from the concentrated position of his employer at this time,” Mr. Daniher said.

        • Should I make an IRA withdrawal or borrow from a home-equity line of credit to make home improvements?

        Even if you are above the age at which you can make penalty-free IRA withdrawals, you might want to avoid it, Mr. Gambetta said. If your income continues to be high enough to make mortgage and credit-line payments, then borrowing the money might work best because interest rates are so low.

        “Plus, the interest is deductible, minimizing the cost of borrowing money,” he said.

        • I have money in a money market earning 1 percent. What is a reasonably safe place that I can put this money for the next 18 months that will earn the best return?

        Look for a short-term bond mutual fund, Ms. Carleton said.

        “The value is going to fluctuate unlike a CD or money market fund,” she said. “But being a short-term fund, it's not going to lose as interest rates increase.”

        • I'm very upset that the funds in my annuity have declined significantly, and that I have limited investment choices within that annuity. What can I do?

Mr. Daniher suggested waiting until the surrender charge period expires, after which you can convert from the annuity to a regular IRA without paying the surrender fee. This will give you more flexibility and control.

        • My children's custodial accounts for their college education continue to lose money. Is this the best way to have their funds set up?

        It depends on the children's ages, but investigate the state-sponsored 529 college savings plans. They offer a range of investment choices, from aggressive to conservative, and carry significant tax advantages over custodial accounts. While gains in custodial accounts are taxed at the child's lower rate, gains in a 529 plan may be free from tax altogether.

        Go to www.collegeadvantage.com for information on Ohio's plan, www.kentuckytrust.org for Kentucky, and www.collegechoiceplan.com for Indiana's plan.

        • We have IRAs that have lost about 15 percent in the past few years. Should we move the money into bonds until the market starts to recover?

        “Right now is the most painful part, and exactly when you don't want to make a knee-jerk reaction,” Ms. Carleton said.

        As long as you are diversified and have a long time horizon for the funds in the IRAs, then you probably don't want to sell and lock in the losses. Untouched, the investments will probably recover given time.

        • I'm 77, and don't need to live off my small Roth IRA. How should I invest it for my children's and grandchildren's inheritance?

        Roth IRAs are great for estate planning because they don't require you to make withdrawals, allowing the fund to grow tax-free for many more years. Once you die, however, the beneficiaries are required to start distributions based on their longer life expectancies, said Charlotte Dougherty, certified financial planner with Dougherty & Associates.

        Because of the longer time horizon on this money, the obvious investment choice would be more aggressive mutual funds. But Ms. Dougherty warns that smaller Roth IRAs also need to be careful to preserve capital.

        Invest in growth-and-income funds, she said, “because the beneficiary might want to conserve capital.”

        • I'm 25, married and still in school. We want to start IRAs but worry about short-term cash needs as well. What should I do, especially if I only have $1,000?

        Planning for retirement is crucial, and Roth IRAs are perhaps the best tool out there, thanks to tax-free growth. But here's a case where opening a retirement account should wait, Ms. Dougherty said.

        “He really only has a small liquid emergency reserve,” she said. “Roth IRAs make good sense, but then he was worried he would have liquidity issues.”

        Ms. Dougherty said to continue to build a liquid emergency reserve, perhaps by making systematic deposits in a money market mutual fund. Start small, and build to create good habits and a solid cushion.

        You don't want to save for tomorrow at the risk of creating overwhelming debt today. Besides, you might be of the age where parents can make gifts to be put in a Roth IRA. With tax-free growth, it's a gift that keeps on giving.

        • I have two IRAs, and am about to start taking distributions. Should I take from both, or just one?

        Under the new IRA rules, you don't necessarily have to make the choice. You can ask your IRA custodians to make the best choice for you, Ms. Dougherty said. The custodian will add the balances in all your accounts and determine how much based on the aggregate amount needs to be withdrawn. Then you can take the money just out of one account, based on guidelines you may choose to set.
       



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