About five years ago I wrote to you seeking your advice about investing, and you told me that the best investment I could make would be to pay down my debt. At the time, I had a substantial amount of charge card debt. I took your advice and now five year later, I am totally debt free and it feels great. I am now in a situation where I can start investing money, and I’d like your advice as to how to proceed. I am now 50 years of age and I plan to work another 15 to 20 years. I would like to save for my retirement to supplement my pension. My first question is should I use my company’s 401(k) plan even if they don’t match? My second question is, do you think it is too aggressive to invest the money 100 percent in stocks? My thought is I am starting late so I need to be a little more aggressive.
First of all, congratulations on becoming debt free. Debt has a way of strangling people, and the fact that you are debt free gives you a new sense of freedom. I cannot stress enough how important it is for everyone to manage their debt situation, and particularly if you have charge card debt, do what you can to alleviate that debt.
With regard to saving for retirement, I do believe a 401(k) plan is a great way to start. After all, it is an easy way to invest because you have money taken directly out of your paycheck. In addition, there are some tax benefits to using a 401(k) plan. If you invest in the traditional 401(k) plan your money grows tax deferred; thus, you only pay taxes on the money once you withdraw it. On the other hand, if you choose the Roth option, the tax break is that when the money is withdrawn, it is tax free. Therefore, whatever option you choose you will have some tax benefits.
With regard to the portfolio, I do believe a 100 percent stock portfolio is too aggressive. I do agree that you are starting late in saving for your retirement; however, as you mentioned in your letter, you’re going to be working for at least another 15-20 years, therefore, you still have plenty of time to save for your retirement.
I’ve always been a believer that diversified portfolios over the long run are what are best for investors. Not only should someone be diversified within the type of equities they own such as large company and small company, foreign and domestic, but it is also important to have some fixed-income investments such as bonds in your portfolio. Even though over the last few years bonds have not done very well, they still are an important part of a portfolio. Bonds can protect a portfolio in different types of market conditions. Therefore, in order to protect your portfolio, I believe you need to have some fixed-income exposure. Even if you were to consider yourself an aggressive investor, 15 to 20 percent of the portfolio in fixed-income investments is prudent.
I get this question a lot about 401(k) plans and that is if the company does not have a match, does it make sense to invest in it. The answer is a resounding yes. The match is a bonus that most companies don’t have. However, even without the match, the benefits of a 401(k) plan are still substantial enough that people should invest in them. Of course, you always want to make sure that your 401(k) plan has good investment options that are low cost. If you find that your company has excessive fees in their 401(k) plan or poor investment options, the course of action is to try to convince the employer to change the plan, because in today’s world there are many low-cost 401(k) plans with very good investment options. If on the other hand you find that your employer will not change the plan, then you may choose not to invest in a 401(k) plan and look for different options such as an IRA.
One final note and that is as a reminder, probably the best investment anyone can make is to pay off their charge card debt. After all, when you pay off an 18½ percent charge card you’re getting an 18½ return on your money, and I can’t think of any investment that would give you such a high guaranteed rate of return. Therefore, for those of you in debt, particularly charge card debt, the best investment you can make is to pay off that debt.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org