Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 2, 1995 TAG: 9501030007
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
In my 401(k), I have $100,000 in a fixed income fund paying 7.9 percent, $30,000 in an equity fund and $30,000 in company stock (no option). I invest $5,668 per year in the equity fund. I have approximately $15,000 in U.S. Savings Bonds and $7,500 in passbook savings to purchase a car. I have no debts.
In 1995, I will receive an inheritance of about $10,000. If I were to invest in American Association of Retired Persons mutual funds, how would you recommend the money be divided among the following funds: AARP High Quality Bonds, AARP Growth and Income, AARP Capital Growth Fund, AARP Balanced Stock and Bond, AARP GMAC and U.S. Treasury Fund?
I have no IRA investment. Which fund would you select for an IRA? $1,500 of the IRA investment would qualify for the tax deduction.
A: Andrew M. Hudick, a registered financial planner with Fee-Only Financial Planning in Roanoke, asked why you would limit yourself to the AARP mutual fund family.
Many of the funds you offer as options are managed by Scudder Fund Inc. and simply vended under the AARP logo and marketing program. He said comparable funds purchased directly from Scudder are available at a slightly lower annual fee than those purchased under the AARP logo.
Somewhere around 4,000 mutual funds are available, and Hudick said he has yet to choose an AARP fund over other funds with a similar objective. In his opinion, he said, there are better funds available in all asset classes and investment categories than any vended through AARP. Because you limit the discussion to the AARP fund family, he declined to make a choice.
When it comes to choosing a category of funds, such as high-quality bonds vs. growth and income, Hudick said the choice would depend on your situation. He would have to know something about your tolerance to risk and your spending habits. He wanted to know whether you expect to draw a pension or whether these investments need to be available to support your retirement.
If you are indeed still earning 7.9 percent in your fixed-income 401(k), Hudick said, he would suggest that you consider increasing this amount. He knows of no commercially available 7.9 percent fixed-rate accounts.
Q: I am having a problem with Central Fidelity Bank. In 1987, I opened a savings account there. The next year, I opened a checking account. They told me I could get an interest-paying checking account as long as I kept a certain amount in the savings account. I signed papers for this but was given no information whatsoever. When my statements came, I didn't realize how this was supposed to work.
In June I noticed in a brochure that they had checkwise checking that paid more interest. When I went into the bank, I was told I already had it, but I wasn't getting the correct amount of interest on my savings. They said they would have to check into this, and it took them two months to get back to me. They said the only thing they could do was to pay me back interest from January 1994.
I don't think this is correct. Since they owe me, they should have to pay me. If I owed them, they would want their money and would use any means to get it. I believe they owe me interest on my savings since 1988. This was their mistake, not mine. I wrote a letter to a bank official in Richmond and have had no response.
A: The bank disputes your contention that you had checkwise checking. A spokeswoman said you had another type of account that in 1988 had the same interest, but the interest on the two types of accounts since have diverged.
Nevertheless, in the interest of good customer relations, Central Fidelity agreed to pay you back interest to 1988, when you opened the account.
Q: We recently refinanced our home mortgage at 6.75 percent on a $108,000, 30-year loan. We have been paying an additional $150 per month in order to pay off this loan early.
Would it be to our advantage to invest this $150 per month instead of paying on the loan principal? I can increase my 401(k) contributions with this extra money, or would some other investment be preferable?
A: David Cissel, a fee-only financial planner with Financial Solutions in Roanoke, said any decision would depend on your age, your federal income-tax bracket and the type of investments you have made in your 401(k) account.
As a general proposition, however, Cissel said most people would be better off investing extra money in their 401(k) plans.
If you pay off the mortgage early instead, he pointed out, you forgo two tax benefits: You reduce the interest you are paying on the house, which is deductible; and you give up the tax deferral on your retirement plan. If you contribute the $150 to the 401(k), he said, your after-tax income will not be reduced by $150.
This benefit is doubled, tripled or quadrupled if your employer matches some percentage of your contribution, he said.
One of the first things most individuals should do, Cissel said, is to contribute the maximum allowed to 401(k) plans.
by CNB