Figuring out which investment vehicle makes sense for couple; suggestions on Vanguard funds for debt-free retiree.
Q: I am 54; my husband is 52. We have an income of $147,000 and fund our Roth and my 401(a) plans. Our mortgage is $465,000 at 3.5 percent, with 26 years left. Should we work harder to pay off the mortgage? If so, at what rate?
A:You can put more money in your retirement plans, in mortgage reduction or in taxable savings. If you save in guaranteed investments such as certificates of deposit, the yield will be low and taxable. So that’s not a good option. Paying down the mortgage gets you an effective return of 3.5 percent. Each payment will reduce the interest cost of the mortgage in the future. The effective rate will be lower because you enjoy some tax benefits from the interest deduction.
That leaves putting extra money, if possible, into your Roth. It gives upper-middle income workers more tax and spending flexibility in the future. It also may help them avoid some of the taxation of Social Security benefits.
Q: I am 70, retired, single and in good health. I have no debt. My assets are my IRA and $20,000 in my rainy-day fund.
Most Read Business Stories
- Tacoma's housing market is now the hottest in U.S. — and Seattle knows why
- Murray Cox is trying to take down Airbnb
- Where US home affordability is the worst
- Smart homes offer convenience but can also compromise privacy
- Young homebuyers scramble as prices rise faster than incomes VIEW
I have about $600,000 invested in Vanguard funds in my IRA portfolios (10 of them). I have a 60/40 ratio of stocks to bonds. I recently talked to a Vanguard money adviser who suggested a 50/50 stock-to-bond ratio. She said that I could do this by investing this way: Put half of my assets in the LifeStrategy Moderate Growth Fund (60/40 ratio). Put the remaining half in the LifeStrategy Conservative Growth Fund (40/60 ratio). This would give me an average 50/50 ratio of stocks to bonds.
Does the Vanguard recommendation sound good to you?
A: The Morningstar website suggests Vanguard LifeStrategy Moderate Growth fund has a middling track record. It ranked in the 48th percentile over the last 10 years. Vanguard LifeStrategy Conservative Growth Fund has done better. It placed at the 25th percentile over the same period.
These are low-cost index funds in a variety of asset classes. Vanguard averages the expense ratios of the included funds. It doesn’t add another fee. So the all-in expense ratios for the funds are 0.16 percent and 0.15 percent, respectively.
The Vanguard adviser made a reasonable suggestion, but you might consider some Vanguard managed-fund options with superior track records and similar expenses. Vanguard Wellington is a managed 60/40 fund and Vanguard Wellesley is a managed 40/60 fund. Mix them half and half, and your portfolio mix would be the same as that recommended by the Vanguard representative. The expense ratios would be 0.18 percent and 0.16 percent.
But the performance is a world apart. Wellesley and Wellington, over the last 10 years, placed in the top 1 percent and top 4 percent. Will they continue to provide such superior results? The odds are against it. That said, I’ve been mentioning these two funds for many years. Why? They have demonstrated superior performance for long periods of time.