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Personal finance chat with Dan Galli

September 2, 2008
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Dan Galli of Daniel J. Galli & Associates took readers' retirement questions. Here is the transcript.

wadeo__Guest_: I have two interest only mortgages. One for 188K and one for 46K. The 46K one is a LOC. I have been paying the principle down on the lower mortgage. Does it matter which one I pay extra on? Thanks

Dan_Galli: It would be helpful to know the rates for each mortgage. Assuming they are both similar, I would get rid of the lower mortgage first, as that rate may be more volatile.

jpm42__Guest_: Hi Dan -- I have about 20K in bonds that have now matured (they were given to me as a kid), and I'd like to invest it all in my retirement. What is the best thing to do? Throw it all in an IRA? I have a 401K, should I throw the money into that? P.S., I'm 30 and it will be a long time until I retire.

Dan_Galli: I'm happy to see that you want to put this money to good use. I would first suggest that you open a personal IRA account. Unless your income bracket is high right now, you might want to consider opening a Roth-IRA. There's no tax deduction for the deposit but the principle remains accessible and all growth and income is tax sheltered. Plus, you may be able to escape federal income taxes completely if you withdraw untaxed money either for your first time home purchase or after age 59 1/2. You can only put $5,000 in for 2008 but you can add another $5,000 just after the first of the year for 2009. After that, you can consider adding to your 401(k) account. Although you can't put the money from the bonds directly into your 401(k) plan, you can increase your payroll deductions to a higher level and use this extra money to offset the drop in your take home pay. This might be a good idea to try. Best of luck!

jesper__Guest_: Where can I go to open a Roth IRA? My bank? Online? I don't know much about them besides that I want one.

Dan_Galli: A Roth-IRA is a good thing to want. You can open them at a bank, mutual fund company, brokerage house or most financial institutions. You can visit them directly or open the account on-line at their websites. Check out the minimum to open the account, which will be different for each institution.

BosHyd__Guest_: For immigrants planning to go back to their countries, does it make sense to contribute to 401k plans?

Dan_Galli: If it were me, I would. You still enjoy the advantages of the 401(k): payroll deduction, tax deduction, tax sheltered growth and possible low expenses. The future account value will certainly help you wherever you live.

Gershy__Guest_: Is it prudent to start investing in a 529 College Savings Plan for my granddaughter (age 1) now, given the current market, or simply bank the money and wait? I would gift the money and do it through my son. I know the Utah Fund is supposed to be tops.

Dan_Galli: I think startin up a 529 plan for a one year old is a great idea. The only concern I woudl have is that there is no guarantee that she will attend college. The current market conditions are inconsequential. This is an investment that will exist for over 15 years before it will be needed. The fact that markets are down right how could prove to make a better time to invest right now than if they were up. Remember, "Buy Low, Sell High". However, it's likely that over the next 17 years, there will be other market lows as well as highs. We invest because we believe that the highs will outweigh the lows over long periods of time. I would get it started now. The more time money is invested, the more tax free growth may be coming out down the road. A good source to check out different plans is www.savingforcollege.com. Best of luck.

rick__Guest_: If you retire at 65 and plan on living for an additional 20 years what's nwrong with leaving 80% of your retirement funds in stock mutual funds. It seems to me that putting too much in to safe bond funds juswt doesn't produce enough capital gains to support another 20 years.

Dan_Galli: Rick, in a word, the problem is volatility. When we are accumulating money prior to retirement, volatility can jar our nerves but if we just stay the course, we can ride it out. That doesn't work when we are retired because we are taking money out of the pot instead of putting it in. If you are unluckly enough to retire into a bear market, (like 2000-2002 or last November 1st), you will most likely deplete your assets before your projected 20 year time frame. Investment allocation during retirement needs to have stocks for growth but the mix must be designed to keep market lows and highs to as low a level as possible. A portfolio of just 80% may not be able to do that.

otter617__Guest_: Dan - I am 28 and a lot of my income is bonus-based. I am receiving about $18k after taxes in February 2009. Currently, I owe about $13k on a car loan at 8.2%. I have no credit card debt, but have over 60k in limits over three cards. I got an offer recently of 1.9% APR for the life of a balance transfer/cash advance with a capped fee of $90. I was thinking of using the credit card to carry the car loan balance, and then pay off the debt in February 2009 with my bonus. This will save close to $1000 in interest according to my calculations. Is this worth doing or am I hurting my credit score for any reason by removing secured debt and increased unsecured debt?

Dan_Galli: I like the idea of saving the money on interest but have a couple of concerns. First, transferring fixed rate debt to a low interest rate card has some potential traps. If you are late or miss a payment, I would expect that low interest card to turn into a high interest nightmare. I don't beleive your credit score will be adversely affected but I really dont' like playing with low interest rate credit card deals. With the number of variables invovled and the short time frame to the payoff, I'd stay with the current loan and just pay it off in February.

JM__Guest_: This may be a difficult question, but a married couple both around 30 years old, is there target amount or percentage of income we should be putting away each month towards our retirement?

Dan_Galli: The rule of thumb that's been around for years has been that if you can save 10% of your gross pay, starting in your twenties, you should accumulate enough to cover your retirement needs. As we get older, the number goes up, i.e. in your thirties, the goal might rise up to 15%. This can be a starting point until you can get a more detailed analysis.

conari__Guest_: My wife and I are 40 and 38, resp. About $150k annual salary, incrementally higher than $100k about 5 years ago. Have $130k in 401k (I put in 14%, wife 0%) , $18k in roths, wife has $8k in other IRAs, about $32k in broker mutual funds (mix of American Funds), and about $140 in cash (MM). $158k mortgage is about 4 years into a 30 year fixed at 6.875%. 6 and 7 year olds at home. Saving $150/mo each in a 529 ($12k and $14k current balances). Given this, talk me out of paying mortgage off.

Dan_Galli: Well, what jumps out at me is the fact that if you pay off the mortgage, you would be using up most or all of your liqidity. Your "rental" of money is costing you 5.875% per year. After a tax deduction, the cost of your mortage is around 4.41%. The question you need to ask yourself is, "Can I earn a higher after tax return on $158,000 than4.41%? If so, you would be in a better place years down the road by not paying off the mortgage. However, you are keeping the bulk of your liquid cash in a money market account that isn't going to yield anywhere close to that in the near future. However, I still come back to liquidity; the ability to lay your hands on cash if you need it. Sure, you can borrow against the house in the future if you need it but what if rates are high then? The cost could be signficant. Consider investing the money market account (at least some of it) a bit more aggressively and let that account grow.

puffin__Guest_: Right now I have funds with Trowe, Great Western, TIAA and Fidelity(ROTH)-I will retire Jan. 09 with a state pension and will be continuing to contribute to the TIAA and Fidelity until I stop working parrtime at a private university. Great Western I want to move as soon as I retire Jan. but wonder what timing I should do and to which firm.

Dan_Galli: Puffin, I don't know all the other details of your situation but will point out some general issues. If you pension will be sufficient to carry your living expenses when you begin your retirement, the other money that you have accumulated will be valuable to you down the road. You will need it in future years to give yourself real cost of living income increases. The money with Great West is most likely part of the State's 457 SMART Plan. I'm guessing the TIAA-CREF money is a 403(b). If you are comfortage managing your assets, you can bring all of those retirement assets (Great West 457, CREF 403(b) and maybe T. Rowe Price IRA)together (except for TIAA money)into an IRA account that you can set up with whatever company you are comfortable with. Invest that account in a balanced allocation and allow it to grow until you need to start withdrawals to augment your pension income. Best of luck.

Dan_Galli: Bill, the Home Equity Line of credit has some advantages over PLUS loans or other college loans. Mainly because the interest (up to $100,000) is deductible. However, the interest rate for a line of credit has the nasty ability to rise and fall with market conditions. For this reason, you may want to consider a second mortage with a fixed interest rate. Try not to let paying for these college costs impact on how much you can save for your own retirement. It's a tricky balance sometimes. Best of luck.

Bill__Guest_: Dan - good afternoon - I have two kids in College, one as a freshman and one in her second year. After financial aid from both colleges, I need to pay about $40,000 per year for the next three years. I have exhausted all savings paying for this years tuition. My plan is to use a home equity line of credit to pay the $120,000 over the next three years. Is the line of credit a better choice to finance college than private college loans?

Dan_Galli: Bill, the Home Equity Line of credit has some advantages over PLUS loans or other college loans. Mainly because the interest (up to $100,000) is deductible. However, the interest rate for a line of credit has the nasty ability to rise and fall with market conditions. For this reason, you may want to consider a second mortage with a fixed interest rate. Try not to let paying for these college costs impact on how much you can save for your own retirement. It's a tricky balance sometimes. Best of luck.

Glenn__Guest_: Have you seen your town's budget? What do you and other finance professionals think of how local MA governments spend taxpayers' money?

Dan_Galli: I can't answer for all cities and towns or any other financial planners but I as far as how things seem to be going in my town of Marshfield, I see people trying to do the best they can to provide services that many people want while keeping up with mandated costs and rising expenses. I suspect that's not the answer you were looking for but I wouldn't want the job. Personal finance is challenging enough.

Dan_Galli: Well, we have come to the end of another quick hour. I sincerely appreciated the opportunity to talk with all of you and hope that I provided some degree of help to your situations. Good Luck.

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