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The Early Investor Gets the Goods
Dear Jeff:
We just moved here from Canada. We have $70,000 to invest. I have no retirement set up in the United States yet. I have $25,000 in a retirement plan in Canada. We owe $70,000 on our house at 6.25 percent interest rate. We have no other debt. My yearly income is $63,000. What would you suggest we do with our $70,000? Retirement is top priority. We are 40 years old.
Jeff Says:
The financial guidance and counseling that I provide to individuals and families such as yours is premised upon their specific concerns. You state very clearly that retirement is your top priority, so my recommendations at this point will be geared to that particular concern only.
Now, you might be asking why I would start off with that comment, but the answer is quite simple. You may have other financial objectives that you have not expressed that could require very different recommendations than those for retirement planning. For instance, tax-deferred investments are ideally suited for retirement, but may not be available prior to retirement age without penalties.
Speaking of tax-deferred investments, this type of vehicle might be a great option for you to consider. You won't get a tax deduction for your contributions, but you won't have to pay income taxes on your growth or earnings until you withdraw the money at retirement. This enables you to earn more during the holding period of the investment because you can keep money invested that otherwise would have been used to pay income taxes.
A variable annuity is a great example of a tax-deferred investment. It offers you many different investment sub accounts, each with its own investment objective such as large company stocks, small company stocks, government securities, foreign investments and the like. Earnings on your investments grow tax-deferred as previously explained, but you will incur a penalty on amounts withdrawn prior to age 59. Additionally, the issuing company might charge a surrender fee if you make withdrawals during the first several years after your contribution. Consequently, a variable annuity is not appropriate for short-term financial goals.
A great feature of the variable annuity that is often overlooked is that it can be passed directly to named beneficiaries at death of the owner and will not be subject to the costs and delays of probate. Finally, many variable annuities provide a guaranteed death benefit allowing the beneficiaries to receive the greater of the contributions made, or the account value. Mutual funds certainly cannot provide any such guarantees. You must read the prospectus before you consider investing in any type of investment, because it contains details of all expenses and benefits of that particular plan. Know what you're getting into.
One final note about your approach to investing your $70,000: I mentioned the vast array of investment choices you might have within the annuity that you also certainly have with mutual funds. The starting point for determining which specific types of securities in which you invest should be based on an asset allocation strategy. This means determining the percentage of your assets that should be invested in the many different classes of securities. This allows you to minimize your risk to an acceptable level while earning the maximum expected for the type of portfolio.
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