Money Watch: How should I invest my money in retirement?
— -- Q: In September, I turn 66 and will continue to work, but will retire at the end of 2013. Should I invest my monthly Social Security checks into an IRA or increase monthly mortgage payments to have home ownership before retirement?
A: As usual, there are several good answers.
If your Social Security checks for that time period would be enough to pay off your mortgage and that's a priority for you, then that's a good use of those funds.
But there's nothing wrong with having a mortgage the rest of your life, as long as you don't have a high interest rate. So if these extra funds won't pay off the mortgage before you retire, consider refinancing now while you still have your income to qualify. You will lock in a low rate and get a small monthly payment.
An IRA is a good way to reduce your "Social Security tax." The money you put in an IRA will defer the income not needed, but you can only add the legal limit (currently $6,000 a year since you're over 50). And if you turn around and take the money out as soon as you retire, it might not gain you much. In a traditional IRA, you'll have to start taking money out at age 70½, so you wouldn't want to invest that money all in the stock market.
If your income is below the limit for a Roth contribution ($179,000 modified adjusted gross income for married households and $122,000 for single folks) and you won't need the money in the next few years, you could invest the $6,000 more aggressively in a Roth IRA, since you don't have to start taking the money out at age 70½.
Many people approaching retirement make the mistake of either investing too conservatively (which could mean they run out of money in retirement) or too aggressively (which could mean they have to cut back their retirement budget to wait for retirement funds to recover).
Ideally, you'll want some conservative money that you could dip into soon and some money in stock mutual funds that can grow until you need it. With current longevity trends, you could need enough retirement money to last two or three decades. You want some money to outperform inflation as well as have some available for your early retirement years.
Saving the money somewhere outside of an IRA is also a good alternative. Anything from a savings account or money market (if you'll need it pretty soon after retirement) to a quality stock mutual fund (if you can let it grow for several years) are just a couple of good choices.
If you have any consumer debt, such as credit cards or car loans, get those paid off before paying down the mortgage or socking it away in an IRA or investment. Your mortgage gives you some tax benefits and if you have a good low rate, it's cheap money. Credit cards generally charge higher rates and have no tax benefits, so getting rid of that drag on your finances is a good top priority.
Linda Leitz, NAPFA-Registered Financial Adviser
Pinnacle Financial Concepts, Colorado Springs, Colo.
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