The Mailbag for June 3, 2005

Marketplace Staff Jun 3, 2005

As mentioned during the broadcast, Chris Farrell’s Retirement Plan

First – save, save, save

Always put the maximum allowed into your retirement savings plan at work. Still, you’d like to save more for the long haul. The first choice is a Roth-IRA. But what if you earn too much to open up a Roth, like listener Jean from Berkeley, California? Then consider the Chris Farrell long-term savings plan. The basic idea is to build a well-diversified portfolio that keeps taxes and fees low and, at the same time, doesn’t involve any penalties if you need to cash in early.

Forget about wowing anyone with tales of savvy stock picks. Let’s just keep it simple. (My editor is yelling for me to keep this short. In that spirit, just don’t fall for the variable annuity retirement savings sales pitch. It’s an alternative, but a bad one. I’ll explain later.)

Second, Mr. Mr. Bonds, I-Bonds

Buy I-bonds for the fixed income portion of the portfolio. Like the mainstay Series EE savings bond, there are no commission costs for buying and selling I-bonds. The appreciation on I-bonds compounds tax-deferred until they’re cashed in, and they’re exempt from state and local taxes. The I-bond offers a fixed-rate of return plus an inflation premium. The investment is backed by the full faith and credit of the federal government, so you can’t lose principal or the fixed interest rate. The I-bond is designed to protect your savings from the ravages of inflation. Even a low inflation rate of 1% to 2% will corrode a fixed-income portfolio over time.

Third, Chris’ favorite thing: Index Fund

Then put some money into a broad-based equity index fund, one based on the MSCI US Broad Market Index, the Dow Jones Wilshire 5000, the Russell 3000, or the Standard & Poor’s 500. Fees are low with index funds. Uncle Sam’s take is minimal, too, since there is no hotshot professional money manager buying and selling stocks-and generating large tax liabilities. Best of all, you’ll outperform about two-thirds of all professionally managed mutual funds. You should also put some money overseas in an international equity index fund. Investing in stocks in a taxable account is far more advantageous than before with the tax rate on dividends and long-term capital gains at a mere 15%.

Now that you’re set for the future, go out and have fun now.

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