Q–I worked for a company for 18 years that later went bankrupt. I recently received notice in the mail from the Pension Benefit Guaranty Corp. that basically says that in 17 years, when I reach retirement age, I will receive $345.79 monthly.
Are there any investments or rollovers I can make now with this pension fund in order to hopefully gain a greater interest rate between now and the year 2015?
A–Afraid not. The Pension Benefit Guaranty Corp. ensures that people with defined benefit plans–pensions that offer set monthly stipends for life–are covered if their company and/or plan goes belly up. They will pay you a monthly stipend, in lieu of getting it from your former employer, at retirement.
But there’s no flexibility to take the money out early or invest the cash on your own.
Q–Is there a general rule I should follow regarding whether it’s best to use any “extra” funds I may have to pay extra principal toward my mortgage, or would it make more sense to put the something extra into my 401(k) plan or into stocks instead?
I am 39, single and only recently got the chance to invest in my company’s 401(k) after I hit my one-year anniversary at a new job.
I earn a good salary, but taxes seem to take out too big a bite for me to have much incremental money to play with on a monthly basis.
I just refinanced my house with a 15-year mortgage. In the first two years of my original 30-year mortgage, whenever I could, I put extra money towards the principal and managed to reduce the loan amount by only $12,000 in that time.
When I think about retirement, the cost of where I live plays a pretty big role in estimating my monthly expenses.
If I know my home is paid for, that relieves some of the pressure, because then I only need to calculate “other” living expenses. That gets me all excited and I think I could retire earlier if the house is paid off.
Any pearls of wisdom to drop my way?
A–Normally, the question of whether to invest in your mortgage or in stocks is one of a sure thing versus a gamble.
After all, you know the rate of return you’ll earn by paying down your mortgage early–it’s effectively the rate of interest on the loan.
If you invest in stocks instead, you could earn a lot more, less or you could even lose principal, depending on how the market swings.
However, in your case, you have the third option of investing in a 401(k) plan, and that’s clearly the best choice for two reasons.
First, companies normally match employee contributions to set dollar amounts. So you put in $100 and the company puts in, say, $25. You get a 25 percent return on your money before you’ve even invested it. That’s a lot better than you could do with your mortgage.
Additionally, because the money you contribute to a 401(k) comes out of your pay before taxes are computed, it costs you less to contribute. If you are in the 28 percent tax bracket, your $100 contribution only reduces your pocket change by $72.
There is a comfort factor in having your home paid off. But, since you already have shortened your payoff time, and because you are concerned about taxes and total returns, the 401(k) appears to be the best answer.
Q–I am trying to start a mutual fund for my parents to use when they retire. I have four sisters and we each want to contribute $25 per month to this fund.
My problem is that I don’t want to be responsible for taxes each year on this fund because I won’t be using the money–they will when they retire.
Do you know how I can start a plan that names them as the beneficiaries and thus responsible for paying the taxes when they withdraw the money?
A–There’s an easy answer, if your parents know about the account or if you don’t mind telling them about it. Have your parents open the account in their own names. You and your sisters can simply fund it.
It’s worth mentioning that if your parents are still working, they can set this account up as a Roth IRA. Then the money that’s contributed will grow on a tax-deferred basis.
As long as they leave the money alone for at least five years, they’ll actually be able to withdraw both principal and interest tax-free at retirement.
If they earn less than $150,000 annually, they each can contribute up to $2,000 per year to a Roth.
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Write Kathy Kristof, c/o The Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053; or e-mail: kathy.kristof@latimes.com
