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Retirement funds: Should you diversify where they're held?

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Tim Shaffer/Reuters

(Read caption) Vanguard Group's CEO Bill McNabb is pictured in the board room at the Vanguard Headquarters in Valley Forge, Pa., Dec. 2. If all your retirement funds are at Vanguard, should you diversify? That's question No. 6 in the reader mailbag.

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Car trade-in math
2. Putting others at ease
3. Safe savings
4. Refinancing timing question
5. Board games for young ones
6. Retirement account diversity
7. Personal finance intervention
8. Mortgage readjustment
9. Mortgage prepayment versus savings
10. Blog focus

On Black Friday, I attempted exactly one sale – an online one. I failed to be at the site in time for the sale. No major loss.

Instead, I spent almost all the day with family members and friends, which took the “black” out of Black Friday.

Q1: Car trade-in math
My wife and I just moved out of our house after doing a short-sale. We were fortunate to live there long enough to pay off our credit card debt and essentially wipe the slate clean. Now at the age of 26, we are living with my parents with close to no bills and a decent monthly income and trying to save as much as possible to position ourselves for a better future. We own a 2008 Nissan Titan, which we financed for 27,000 out the door. Its our only real debt and I believe we owe less than its value because we pay slightly more every month than the minimum. I’ve been considering trading it in on a 2011 Hyundai Sonata for a few reasons. Assuming the dealer paid off the Titan in full, I should be able to negotiate a lower monthly payment on the sonata, the insurance is the same, the gas and maintenance would be much less. So all in all, I think by doing so I could save an additional $200 dollars a month to be reinvested. I understand that all the money we’ve paid into the truck would be “lost” but in the “wiping the slate clean” phase we are in, and with the primary goal to be save as much as possible, do you think this would be a wise decision?
- Beau

From what I can tell from your description, you’re wanting to trade in a vehicle that you borrowed $27,000 for (likely giving you payments of about $500 a month, depending on how you purchased it) essentially for the current value of the car in hopes that the amount will be enough to pay it off, giving you a break-even on that car. Then, after that, you want to buy a Sonata, ideally with a loan that gives you payments around $300 a month, “saving” you $200 a month.

I agree with trading in the Titan. $500 a month is pretty steep for a car payment and if you can easily get yourself out of it, that’s a good thing.

I’m not in favor of replacing it with a brand new Sonata if you’re having to take out yet another car loan to finance it. I would get a late model used sedan for about half as much as you’d pay for a new Sonata, pay that off as fast as possible, then save at a significant rate for its replacement.

Why? If something goes wrong in your life – you lose your job, etc. – you either have a paid-off sedan or, in the worst case, a car with much lower monthly payments than if you “bought” a new one.

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Never buy a new car unless you can write a check for it.

Q2: Putting others at ease
I noticed you mentioned the ability to “put others at ease” in a couple of recent posts. I am a caseworker for social assistance in Ontario, Canada and I would like to improve my ability to do just that, to help the clients I work with to feel at ease with me. Are you able to recommend any reading on this subject or do you have any further observations in regards to developing this specific skill?
- Kyla

The best book on this is probably Dale Carnegie’s How to Win Friends and Influence People. I would suggest that for detailed reading.

The easiest method I’ve found for putting other people at ease face to face is by figuring out what they most enjoy about their life and asking them about it as a conversation starter. Look for clues. What’s on their clothing? Do they have a keychain with a picture of a child on it? Just look them over for things that identify what they’re passionate about.

When you have an idea or two, ask about them. Get them talking about something that makes them feel good and they’ll begin to feel more at ease with you.

Q3: Safe savings
I’m saving $30,000 for animation school which I won’t be attending for about 3 years. In the interim, I’m going to finish my fine arts degree. After that, I’ll then use the money saved towards animation tuition. While I’m working on my degree, though, what should I do with the $30,000? What’s something that is safer, yet allows my money to grow? It needs to be locked away, essentially, since I’ll be on student loans during the three years. I was thinking GIC’s, but the return is only 2.5%. Others have said I should put a down payment on a house and then sell it. What would you suggest?
- Tighe

I’m pretty certain that Tighe comes from Canada, where GICs are roughly the equivalent of treasury notes in the United States.

The real question is how stable Tighe wants his savings to be. If he has zero tolerance for losing any of the balance – well, in truth, there is no zero-risk investment but you can get the risk pretty small – a GIC is probably a very good choice, especially at 2.5%. Another option would be to simply stick it into a savings account somewhere, wait, and perhaps move it as interest rates rebound over the next few years.

If you start looking at things like buying a house, you’re introducing significant risk into the equation – you’re banking on an open market, where the value of the home can go in either direction. If that specific market falls from where it’s currently at, then you’ll lose money. The risk in buying a house strictly for a return in three years is pretty significant.

Q4: Refinancing timing question
My husband & I are expecting a large investment to pay off in the next year or so. It would pay off half the value of our home. After we make that payment, should we keep paying off the mortgage as it stands (rate of 6.25%) or refinance? Which would prevent us from paying the most interest on a home loan?
- Stephanie

Your best bet is to refinance, considering you can refinance down to 4% or below. Any time you can drop your interest rate more than a percent or so, it’s probably worth it to refinance.

Can you refinance now? If it is possible, now is the best time for you to refinance so that you can spend the next six months or so paying 4% interest instead of 6% interest on your home loan.

Of course, you might not be able to, particularly if you’re underwater. If that’s the case, make your big payment in 2011, then refinance as quickly as you can.

Q5: Board games for young ones
I want to get my 4 yr old twin daughters involved in board games. Could you recommend a couple to get them started. Maybe some that your kids have enjoyed that really get them thinking.
- Justin

I currently have a five year old and a three year old, so my best suggestions for you would be the ones that the two of them request and play together.

The one the two of them most often request is The Kids of Carcassonne, which really helps the younger one with spatial skills. The older one sees a bit of strategy in it and is thus often able to beat his younger sister.

They also have a copy of Travel Blokus that they play against each other quite often. As with the above game, my son sees the game differently than his sister and usually wins.

My older one’s favorite game is Hey! That’s My Fish!, which is similar in complexity to checkers but with much cuter pieces.

Q6: Retirement account diversity
What are your thoughts about having all your retirement accounts at one financial institution? I have a 403B and Roth IRA at Vanguard. My part time job boss is starting a SEP IRA for me and gave me the option of starting it at Morgan Keegan or any other institution of my choice. my initial reaction is just to stick with Vanguard, but what if they go bankrupt? Would I lose all my accounts? Is it safer to put the accounts in a few different places?
- Jennie

Vanguard’s funds (as are those of virtually every investment house) are protected by the SIPC, which ensures that most missing investments are reimbursed. You can read their brochure to find out more.

The SIPC protects your investments up to $500,000 in total value (up to only $100,000 in cash). If you have investments exceeding that, you may want to consider diversifying across various investment houses.

If you’re nowhere close to that, I wouldn’t worry about it at all. Pick the best investment house and stick with them.

Q7: Personal finance intervention
It recently occurred to me (I finally admit) I am dangerous when it comes to my personal finances. I quite honestly don’t know what to do — how to create a budget, how to keep a budget, how to manage monthly expenses… all of it.

I realize I need help… and the best help I can think of is to find someone who can teach me how to manage a budget on a month-to-month basis… kind of like taking piano lessons. I need to take lessons in personal finance. What do you recommend I do as a first step?
- Phillip

The actual “learning” of how to create a budget and use it from month to month is something you can teach yourself. In itself, it’s not challenging.

The challenge comes from sticking with it, and that’s a matter of psychology and motivation. The best thing to do with regards to this is to find a “money buddy” of sorts – someone who you feel comfortable enough with to openly talk about your finances with, both your successes and failures.

There’s no need to pay for someone like this – you probably have such a person in your social network. Do you have a close friend who might also be going through such a period of financial re-evaluation? That’s the type of person you’d want as your “money buddy.”

Q8: Mortgage readjustment
My husband and I recently bought a single family house. We got a loan for 392k after 20% down payment and the interest rate is about 4.5%. The monthly payment is about 1986.21 and I pay 2000 per month. Apart from our mortgage, we don’t have any debt. Both of us work and we don’t have any kids right now. We both put in around 10% of our pretax income into our 401k and have a healthy emergency fund to fall back on. I’m currently searching for a new job and recently sold all the stock that I had in ESPP from my company – around 35k. The question is regarding what to do with this money. We have 2 options – one is to put this money into our mortgage. If we put this down and readjust our mortgage($250 charge), the monthly payment goes down by approx. $200. A concern I have with this option is that with the housing market down, should we put down more money into our house?

Other option is to invest this money in a CD or mutual funds. I’ve checked out the CD rates and they’re very low – around 1.5-2% at the most. I’m not very familiar with mutual funds and am hesitant to take a risk in putting such a large amount into the stock market.

Are there any other options I should consider?
- Shanna

One mistake I think you’re making is tying the value of your home to your mortgage. Unless you’re considering walking away from your mortgage – which you shouldn’t even be considering unless you’re way underwater – making extra payments on your mortgage shouldn’t hinge on the value of your home. It should hinge on interest rates and minimizing the overall amount of money you’re handing to the bank in the form of interest.

When you choose to sell your home, you’re going to have to deal with the mortgage on it, regardless of whether you sell sooner or later and regardless of whether your home value goes up or down. The more you’ve paid down your mortage, the more likely it is that you’ll have a surplus when you decide to sell.

In your case, I would absolutely pay down the mortgage first. It’s essentially a risk-free way to maximize the return on your money.

Q9: Mortgage prepayment versus savings
I have ~$450K in retirement savings and $27K in emergency funds (4 months worth). My mortgage has 28.5 years to run at a 4.1% fixed rate, which I can reduce to 10.5 years if I prepay $1K/mo (which would basically require an either/or choice to add to the emergency fund or to prepay). I am 43 years old, job is fairly stable, no looming risks that I can see. With company match, currently contributing 17% of my pre-tax salary to 401(K) with plan to increase that at the rate of 1% per year. Should I be prepaying?
- Brent

Do you want to retire on the first possible day or do you not mind waiting a few years beyond that for a more stable retirement?

That’s really the question here. If you prepay, you’ll have your mortgage gone at age 54 – otherwise, it’ll be at age 70.

If you’re shooting to retire on the first possible day, meaning you’re maximizing your retirement savings, you’re going to have mortgage payments for the first decade or so of retirement, making it much tighter to make ends meet.

Really, the “best” choice relies on being psychic about the future of the stock market – and no one can really predict it.

If I were you, I’d figure out a retirement age at which I’d like to retire, then figure out how much extra I would have to pay each month on my mortgage to make the mortgage vanish at that date (or just a bit before). Then, I’d use the remainder of that $1,000 per month and put it into retirement.

Q10: Blog focus
Sometimes you write posts or include questions in your reader mailbag posts that have little to do with personal finance. Nevertheless, you maintain the focus of The Simple Dollar very well and people seem to enjoy (and request) these little diversions. I’m guessing a lot of that has to do with regular readers wanting to get to know you better. How do you maintain your blog’s focus while allowing for this flexibility?
- Christine

That’s because The Simple Dollar isn’t really a personal finance blog per se.

Yes, on the surface, I talk about money issues a lot. The real focus of the site, though, is finding a balanced life – and I’m using my own life as something of a laboratory for finding it.

Personal finance is a key part of that balance and it was the first part of it that I really understood. Without having your money in order, it’s very difficult to build a better life for yourself.

But it goes beyond merely being all about the dollars. It’s about time management and knowing what you want out of life. It’s about setting goals and reaching them. It’s about relationships with others and the career that you want. These are all tied in with money, of course.

It took me a year or so of doing The Simple Dollar to really start understanding that it wasn’t really about money. It was about finding a better life and using myself as a lab to do it, with the implicit understanding that good personal finance is a very key part of it. That’s what I’ve stuck to ever since – and it allows me a pretty broad range of stuff to write about.

I find that it takes a while for every good blog to really figure out what it’s about. It’s usually not immediate – it takes some time for the idea behind the blog and the person (or people) writing it to really come together. Often, it winds up being something completely unexpected. I didn’t think The Simple Dollar would end up being about the things I write about now when I started writing pure frugality posts in late 2006.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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