Q: I have had about $150,000 from an inheritance sitting in a savings account for the last two years. I’m trying to figure out what to do with it.
I am collecting my public-school retirement and am working part time. My husband is an academic and has no plans to retire for the next few years.
We have no consumer debt. We are on track to pay off our home mortgage in the next few years. Is there a better option for the money in the bank?
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A: At some point you need to make a plan for how your inheritance will be invested for the long term. And since you’re not being paid anything for money sitting in a savings account, you might as well focus on that long-term plan today.
The most basic and simple portfolio that you could have would be to invest half your money in a low-cost Treasury Inflation-Protected Securities (TIPS) fund and the other half in a U.S. Total Stock Market Index fund.
Since many people are worried about rising interest rates and their impact on TIPS, you could invest in one of the TIPS funds that invest in shorter-term securities. Because they are shorter term, they are less vulnerable to loss.
Yes, this portfolio will rise and fall in value, but it will likely provide a long-term return that is much higher than you’ll earn in cash, savings or certificates of deposit, and there is a high probability that its long-term return will be greater than the rate of inflation.
The return on your savings account is less than the rate of inflation.
Q: I am past retirement age, but still employed as a psychologist at a local school district. I enjoy my job and am not even thinking about retirement.
I have several investments, all of which are in managed mutual funds through an association with the school district and the following companies: TIAA-CREF, ING Retirement and Great West Retirement Services. The total investment is about $480,000.
In TIAA-CREF, I also have a managed portfolio account, which is invested in actively managed mutual funds. I am contemplating investing these portfolio funds in index funds, either through TIAA-CREF or Vanguard or Fidelity.
Should I do the same with the other funds? It is only recently that I learned about index funds. I am not savvy about finances.
A: Yes, you should do the same with the other funds.
When you move to index funds, you will accomplish two things: You will eliminate the much higher expenses of managed funds, and you will eliminate what some call “manager risk” — the risk that your particular manager will have a bad year or a series of bad years.
It all boils down to how you answer a simple question: Which would you prefer, a 70 percent chance of success or a 30 percent chance of success? With index funds you have about a 70 percent chance of beating your choice of managed funds.
Copyright 2013, Universal Press Syndicate