Costco Connection - September 2008

FINANCIALconnection
Heir today,
Also:
n SEP IRA
n 401(k) plan
gone tomorrow?

Ask Suze Orman

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Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088,
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suze@costco.com.
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Suze Orman’s latest book is Women & Money: Owning the Power to Control Your Destiny. Her TV show airs Saturday nights on CNBC. Suze can be contacted at: www.suzeorman.com.

By Suze Orman

KEI TH LATHROP

I am 72, my sister is 69. We received an inheritance. My sister put $200,000 in government bonds. I put $100,000 in a five-year jumbo CD [certificate of deposit] at 4.98 percent. Did I do the best thing? Should I go with government bonds when the CD term is up? We are both retired. She rolls over her interest. I use my interest for income.

—Nancy Hudson Aliso Viejo, California

BOTH APPROACHES are fine. The only problem with a five-year CD is that you are locked into that rate for a long time. You might find yourself frustrated a few years down the line if interest rates have gone up and you are still earning just 5 percent. One option is known as “laddering”: You could put one-third of your money in bonds that mature in five to seven years, another third that matures in three to five years and the rest in just a one- or two-year CD. That way your total income payment will remain higher than if you had it all in short-term bonds or CDs, but you will also have a rolling schedule of money that is maturing and you will be able to reinvest it at higher rates.

In the meantime I want you to make sure your jumbo CD is safe. Check that the bank is in fact Federal Deposit Insurance Corporation [FDIC] insured. In this rough economy, some banks are going out of business. IndyMac Bank was deemed insolvent in early July, so you can’t be too careful. If your bank isn’t covered by the FDIC—most are—I would seriously consider paying the early-with-drawal penalty and moving your money to an FDIC-insured bank so it is safe.

If your current bank is FDIC insured the general rule is that the FDIC guarantees full payment up to $100,000 for any individual account. (If you have a joint account with someone else and you are both entitled to equal shares, a total of $200,000 in that account will be fully insured. Certain bank retirement accounts up to $250,000 also get full coverage.) Because your CD is for $100,000 I want you to move any other money you have at that bank, such as checking and savings accounts, to a different bank. The safe move is for individuals to never have more than $100,000 at a single bank.

I am 27 years old. The company I work for set me up with a SEP IRA [Simplified Employee Pension Individual Retirement Account]

account last summer. The beginning balance that was contributed by my employer was about $8,500. (I have yet to make my own contributions to the account.) At this time, the balance remains nearly the same, but at one point it was as high as $9,500. It has steadily dropped since then. I would like to know exactly what a SEP IRA account is. Is this a good retirement account to have, or should I invest in other outlets?

—Norma Nuñez Concord, California

A SEP IRA is just a generic name for a standard retirement plan that many small businesses offer. What makes them good—or bad—is the specific investments that are made in the SEP IRA. Typically they would be mutual funds. So you need to find out what your account is invested in. You want to hear that it is no-load mutual funds with annual expense ratios that are less than 1 percent a year. In fact, you should be able to choose your own investments. Go for stocks funds with low costs; I think index mutual funds are a great option. Consider yourself lucky that you work for a company that offers this great retirement benefit.

I have a 401(k) plan from Nordstrom retail company, where I worked for nine years. The plan is worth about $45,000. Because stocks have been so volatile, my husband wants to withdraw the money to pay off debts, and put the leftover money into a bank CD account.

I’m 57 years old, and if I withdraw money, I have to pay a penalty and tax. But I’m also afraid that if the stocks keep going down, I’ll lose that money too.

—Sea Permelli San Mateo, California

IF YOU WERE at least 55 years old when you left your job you can withdraw any amount of money you want from your 401(k) without a penalty, though you will, of course, be stuck with the income tax. Instead of cashing it out I recommend moving the money into an IRA rollover account where you can choose whatever investments you want, including CDs or other low-risk investments. You shouldn’t use retirement money to pay off debts. What will you live on in retirement? C