Expert: Paul Henneman - 8/27/2007

Question
I am 62 years old and about to retire. In addition to my Social Security and company retirement, which I intend to take as an annuity, I have $100,000 in a 401(k) and about $60,000 in two CDs. My question concerns what to do with the money in the 401(k), which currently is making me about $250 a month in interest.

My spouse wants me to cash in the 401(k) and put it into a money market account - or apply it (sans the roughly 30 percent tax hit we would take) to a new residence we have been thinking about upgrading to.

I think a different type of rollover would be best, but as to which kind I don't have a clue. What do you think might be the best alternative(s)for me and others in a similar financial circumstance?

Answer
Ron,
  Thank you for your question.
  The tax issue will apply no matter when you withdraw the 401k funds. If you do withdraw it now, you would lose the additional income those funds could generate for you going forward. Read on for what could be done to increase your income from these funds.
   The 401k could be rolled over into an IRA account that you would have control over. you could do this through a financial advisor, or set up a brokerage account online at a service such as Etrade.com or scottrade.com  (I would recommend calling them first to find out the exact procedure to roll your 401k into an IRA account).
   You can conrol the investments you have in it. For example, the simplest thing would be to purchase an Index mutual fund. These are mutual funds that track an overall index. This means that the performance of your investments will always match the overall performance of that index. For example, Vanguard has the mutual fund with ticker VFINX that tracks the S&P500, perhaps the most stable and appropriate index for this purpose.  On average you could expect about a 11% yearly return. Some years will be good, other years will be bad, but on average over time you should see about that return. Currently you are seeing $250 a month, or $3000 a year on your 401k. If you put the $100,000 into a fund like this, an average year would yield many times that, about $11,000.  
   A good investor is always diversified, so you should still consider keeping a good portion of your investments in something perfectly safe like a CD. The percentage of how much to invest in riskier buy higher yielding investments like stocks or mutual funds, and how much in safe investments such as CD's, is up to you. It just depends on they type of person you are, how much risk you are willing to take. But for me, the overall goal would be to maximize the income that you could receive from your investments, without depleting the overall balance each year, perhaps even adding to it slowly. At 62 you very well have many decades to go, and increasing your yearly income will make your retirement most enjoyable, rather than cashing it all in now. Keep in mind that while inflation is not significant each year, over the decades it adds up. This means that things become more expensive over time. Either your income needs to grow, or you will find that your standard of living will need to slowly decrease over time as inflation makes you pay more each year for the same items.  Your social security and company retirement will likely not increase, those are usually set amounts. Not a big deal in the coming few years, but 1o or 15 years down the road this becomes very significant.
   There are lots of other options that you could do with your investments. I strongly recommend that you read "Investing for Dummies". While not exactly a flattering title, this will give you a basic understanding of more forms of investment and go a long way in helping you decide what is best for you.

I hope this helps a bit, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com