Getting Personal: How to invest, to save or pay down a debt?

Getting Personal

On tap this week: A newly reformed bad money manager is wondering whether to pay off debt quickly or to save, but pay down the debt more slowly; a postdoctoral student wonders if he can start a Roth 401(k) if he already has a Roth IRA; and a nurse a few years from retirement wonders how to find a solid dividend-paying stock.

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I'm a big fan of your show. I listen almost every week. But I must say the advice this week from Liz Weston was somewhere between questionable and outright wrong.

First, she keeps saying that investing $1,000 in your 20s will leave you with $20,000 (or that $1,000 invested in your 30s will leave you with $10K). In order for this to happen, you would need to earn more than 7% above inflation (and management costs) for either 45 or 35 consecutive years, respectively. This doesn't seem very likely to me. Over the last 10 years, the stock market has average -2% annually after inflation. Almost no reasonable person would or could expect to earn 7% annually above inflation and investment expenses for that many consecutive years.

Secondly, I thought it was odd for Tess and Liz to practically make fun of the 62 year old woman who decided to get out of the stock market in early August. I think most of us wish we would have taken all our money out at that time. Given that she is 3-5 years from retirement, her decision seems pretty reasonable to me.

Finally, I get tired of hearing nearly every financial adviser describe "lifecycle" funds as something that only uninformed people would/should ever use. I think there are very, very few Americans who could pick the right mixture of stocks, bonds and other investments relative to their age and have the discipline to rebalance on a regular schedule, and systematically adjust the mixture as they age. I bet 95+% of all Americans would be FAR better off putting all of their retirement funds into a lifecycle fund.

You mentioned that investing in a retirement fund in your 20s equates to about a $20K advantage. I started investing in a 401K in my 20s, it became a rollover when I was 28, the market tanked, it went up a little, it dipped again, and it has never really gained anything. Today at 40, it is the same amount as it was when I was at 28. So in the markets today, I'm simply not seeing that return. Thoughts?

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