Question:
Currently I am 28, married and have a daughter who is 10. The only debt I have is my home, which I currently owe $300,000 on. We have $100,000 in equity. We do not have any investment accounts now and have $400,000 in our checking account (yep, I know it’s crazy!). I want to put money away and begin compounding interest.
My 2 main questions are:
1) where should I put the money? I want to retire around 50, so 20 years from now.
2) what percent gains on average can I expect each year? I’ve done the compounding interest calculator and it really begins to put out large numbers once its gets over 10% a year or so.
Response:
Carmen Wong Ulrich Sep 17, 2013 Former Host
Holy guacamole. That’s quite a stack o’change you’ve got there. And at your age … APPLAUSE!
But, you’re very right. That much cash just can’t sit there if you want to make it last into your retirement years. First, slice the piece of that pie that you’d need should you (or your spouse) become unemployed, giving yourself six months to a year of living expenses. Set that aside — it’s your emergency fund and it needs to stay in cash because you can’t afford to risk any losses on it. The rest, yes, you need to put it somewhere else.
Some questions for you though: Do you have access to 401k’s or another employer-sponsored retirement plan? Have you been contributing to those as well? If so, do you have a traditional IRA for each of you that you can max out contribution limits this year and years following? Those IRAs can grow your money tax-free, though both are taxed when you withdraw after retirement. You’re at a level of savings where, if you’re not familiar with all your options, you’ll need a lot of research and learning. You should see a fee-based, certified financial planner (find a handful near you and interview several at www.FPAnet.org). Before you make any moves or sign anything, research the costs of the products and/or tools that are being presented to you as options.
As for that 10% return you mention, well … dreams are good to have! The fact is that over the long term (20 years), the going expected rate of return is closer to 4% or 6%. If you want to retire so soon and make your money last, you can’t go with very risky investments that may not give you a higher rate of return. And reconsider retiring so early. You’ve already been great with money, but figure that your life expectancy could be 80-plus. So that’s over three decades of not making money. Of course, you’re so far ahead, if you stick to what you’ve been doing when it comes to saving, and you keep expenses low, your dream may become that reality.
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