; Stay with CDs?
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By Suze Orman
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I am a teacher paying 9. 4 percent of my salary to a teacher retirement fund for my pension. In addition, I have a 403(b) retirement
account through my employer and a Roth
IRA. My district does not have any kind of
matching program for 403(b) contributions.
Recently, I stopped contributing to the 403(b)
plan so that I could contribute the maximum
amount to my Roth IRA before my husband
and I reach the income limits for married
couples filing jointly. It’s my plan to reestablish contributions to my 403(b) account when
I am able. Is this the correct decision? Or is it
better to contribute smaller amounts to both
the 403(b) and the Roth IRA?
Muffy P., Arlington Heights, Illinois
BECAUSE YOU DO NOT receive a matching contribution from your employer, you should focus
your savings on maxing out on your Roth IRA first.
And promise me that your Roth IRA is invested
in no-load, low-cost mutual funds or exchange-traded funds (ETFs). You can build a smart diversified portfolio with low-cost funds and ETFs that
charge an annual expense ratio of around 0.5 percent
your money in your ex-employer’s plan to what
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BRIAN BOWEN SMITH
We tend to focus on returns, while not appreciating the impact low fees can have. Consider that
$5,500 (the 2013 IRA contribution limit if you are
younger than 50) invested for 25 years in a portfolio
with an average expense ratio of 0.50 percent would
grow to about $297,000, assuming a 6 percent annualized gross return. If the same amount were
invested in a portfolio with an average expense ratio
of 1 percent, your savings would grow to about
$275,000. Paying attention to fees is a great way to
make more money.
I am a 42-year-old teacher living in New
Jersey. I am currently pursuing a teaching
position closer to where I live. New York
City wouldn’t grant me a leave, so I retired.
I was told by my union to leave my 401(k)
where it is, and I’m not sure if that is the
smartest move. I have a portfolio with First
Investors, and my adviser told me it might
be smarter to roll it over.
Anne S., New Jersey
AS I JUST EXPLAINED, the advantage of
investing outside an employer-provided plan is
that you have the freedom to pick your own
investments. You need to compare the expense
ratios and any other fees you are paying to keep
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you could pay if you rolled over the money into an
IRA at a discount brokerage or fund company and
built a solid diversified portfolio from low-cost
funds and ETFs.
It is fine to work with an adviser, but I sure hope
your adviser didn’t recommend a rollover because
he or she would earn money from commissions on
reinvesting your money. It is smarter, in my opinion,
to work with a fee-only adviser, to whom you pay a
set amount of money. That way the adviser can give
you the best advice, not advice that will generate
If you do decide on an IRA rollover, I encourage
you to think about converting the money into a
Roth IRA. You will owe tax on the converted
amount, but once the money is in the Roth IRA you
will have the ability to make tax-free withdrawals. It
is vitally important to work with a tax pro with Roth
conversion experience. You don’t need to convert
everything at once; a smart tax adviser will work
with you to minimize the tax hit.
I have about $50,000 in CDs that are maturing
this month, and reinvesting sounds ludicrous
since they are earning only 0.3 percent today.
I am 70 years old and don’t want to invest in
anything risky or that I can’t get out of without too much difficulty.
Tal P., Orlando, Florida
IF THIS IS MONEY that you want to keep safe and
sound—and liquid—the reality is that you will need
to accept earning next to nothing. Because of Federal
Reserve policy, interest rates on federally insured
bank deposits—such as CDs and savings accounts—
pay very little. And the Federal Reserve has indicated
it intends to keep those rates low through 2015. I
understand how frustrating that is for savers such as
yourself; back in 2008, you could earn close to 4 percent on a one-year CD. Today, you can typically earn
0.25 percent. But if your priority is safety, you must
realize that anything paying more carries some risk.
If you don’t need that $50,000 for living expenses
in the next few years, and if you are willing to
assume some risk, I recommend that you learn
about dividend-paying stocks. Many solid blue-chip
companies not only have dividend yields of 3 percent, they also have a history of raising the dividend.
That creates a rising income stream for investors.
There are low-cost ETFs that focus on dividend-paying stocks.
Of course, all stocks can be volatile. So I want to
stress, people should never invest money in stocks—
even dividend-paying stocks—if there is any chance
they will need to cash out their investment within 10