Expert: Paul Henneman - 5/26/2006

Question
dear Sir,

I was left some money in a will.  A local bank has a 12 month rate of 5 and one half %.  I checked on different other money market stuff on line and they only go to 4.45%.  Should I tie the money up for a year.  It is about a hlf million.  I also recieved a 401K and should I roll it or take the 20% penalty and put the money somewhere.  Any advice,well good advice will be appreciated, just kidding but I have no clue on what to do as other banks only offer 1% in their accounts..    Thanks for your consideration.

Answer
Ron,
   Thank you for your question! This all depends upon if you think that there is any chance you will need or want that money in the next year. If not, then there is no worry, simply  invest with the best rate. Money market interest rates are variable, and they are at a fairly high level these days. Even so, it is a percent less than the CD, so about a $5,000 difference in your returns over the first year. Simply put: If you lock your funds up for the year in the CD you will have $5,000 more at the end of the year. That is what I would suggest, providing of course you do feel that there is no reason at all why you would need access to those funds during that time period.
    The 401k is a bit different, and a more comlicated topic.  This would depend at least partially on the exact investments in the 401k, and if it is a good plan. By a good plan I mean what the options are to invest the funds in it. Perhaps you could look at the historical performance of the funds in the 401k, and if you find them attractive, you could leave the funds there. Another concern is that you appear to be a very conservative investor, being primarily interested in locked in returns. This is good in that you carry no risk in things like CD's and money market accounts, but bad in that the returns are much lower. You should always figure on roughly 2% for inflation, so you are really only getting 3% returns on the CD. If you cash out the 401k and take the 20% penalty, it will take a VERY long time to regain those funds in CD's or money market accounts!
   Another question would be your age. If you are within 10 or 15 years from retirement it would be best to leave the funds in the 401k, and simply withdraw with no penatly later. If you are fairly young with decades before retirement, it would make more sense to align all of your investments with exactly what you are most comfortable with.
   I would suggest picking up a copy of "Investing for Dummies". This is a great and fairly simple read that will give you the basics on most forms of investment, including CD's, money market accounts, 401k's, and mutual funds.
   I would suggest considering two things that fall outside of your question, but may match your needs. First, consider staging your CD's. If you put one fifth of your total funds into a CD each year for five years, you would then have one fifth of your fund maturing every year. When it matures, you simply put it back into a cd. But this means that if needed, you would not have to wait long to access funds. It would also spread the funds out over a longer period of time to protect agains rising or falling CD interest rates.
    A second thing I would suggest is mutual funds. I know that investing in the market is much more volatile. But over the years the performance will be vastly superior. It would be simple to purchase a index fund that mirrors the S&P500 overall performance. The book I mentioned above will describe this in more detail. But perhaps at least a small part of your funds should be in such an investment, at least 10%, perhaps more if you are comfortable. But no more than 40%.

I hope this helps! Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
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