I'm Loaded. Do I Need Stocks?

Stocks & Bonds

I'm Loaded. Do I Need Stocks?

Adding a dash of stocks would keep inflation from eating away what you've worked so hard to build.

I am 63, have been retired for three years and spend about $90,000 a year. I receive a total of $30,000 a year from Social Security and a company pension. In addition to the equity in my house, I have $2.4 million in a 401(k) plan invested in a fixed-income account that has been earning between 5% and 6%. The interest, plus the additional $30,000 in annual income, easily exceeds my expenses. So why would I ever invest in stocks or stock mutual funds? -- B.D., Mesa, Ariz.

With a nest egg of that size, odds are you'll have plenty of money in retirement. Still, adding a dash of stocks would reduce your risk, boost your return and help keep inflation from eating away what you've worked so hard to build.

A portfolio that's 100% invested in bonds limits your options if your spending increases -- you go on a philanthropic streak, for instance, or incur unexpected medical bills. But your biggest risk is that inflation will erode your purchasing power over time. "The only way to stay ahead of inflation is to own assets that appreciate at a faster rate," says Chris Brown, a financial adviser in Rockville, Md. "Those usually aren't fixed-income investments."

Owning both stocks and bonds also adds safety because those investments tend to move independently of one another. Ibbotson Associates, the investment-research firm, has found that shifting just 25% of an all-bond portfolio into stocks can cut risk and lift returns if you stick with your portfolio mix for at least ten years.


Don't miss these deductions

I often buy things for my church -- ink for the printer, food for church dinners, flowers for the altar, postage stamps -- and pay for them out of my own pocket. Until this year, I kept receipts for everything I purchased, along with notes on what each expenditure went toward. Do the new tax rules for 2007 mean I can no longer deduct these expenses? -- Bob Green, Dunkirk, Md.

You can still deduct those out-of-pocket charitable expenses, and you'd be wise to do so. People often forget to keep track of unreimbursed expenses, so they miss out on tax deductions, which can add up.

It's a good idea to keep two types of records for charitable donations. In addition to collecting your receipts and notes, request a written acknowledgment of the donations from your church that includes the dates and amounts of the contributions, advises Mildred Carter, senior tax analyst for tax publisher CCH. It's not too late to get this paperwork even if you've already made the contributions. You just need to get it before you file your tax return, says Carter.

By the way, the new tax law you refer to applies to cash donations. In the past, you could keep track of small cash donations on your own. Now, to take a deduction, you need a bank record or written communication from the charity that lists the charity's name, the amount of the contribution and the date the donation was made.


Is my certificate of deposit safe?

What happened to depositors who had money in NetBank when it was taken over by the Federal Deposit Insurance Corp.? I have a $20,000 certificate of deposit with Countrywide Financial, and I'm wondering whether my CD is still safe. -- Dong Luo, Seattle

Don't worry about your CD. Countrywide is insured by the FDIC, and your deposit would be fully insured up to FDIC limits if the bank failed. So as long as you have $100,000 or less in Countrywide accounts, the FDIC will cover all of your money (check the rules on insurance limits at FDIC.gov).

Plus, you're probably getting a good interest rate. Some banks that do a large business in mortgages are offering particularly high rates to attract deposits.

NetBank's experience shows how well FDIC coverage can work in the event of a failure. The bank closed on Friday, September 28, at 3 p.m., but customers could continue to use ATMs, checks and debit cards to get access to their FDIC-insured funds. By 10 a.m. on Sunday, September 30, the bank's Web site was active again and customers had full access to their accounts.


The portion of depositors' accounts that was covered by the FDIC, plus 50% of their uninsured funds, were automatically transferred to ING Direct, which took over the accounts. Interest rates on CDs haven't changed; interest rates on savings and money-market accounts will convert to the rates ING Direct is paying.

A capital credit-card strategy

Capital One recently sent me a notice saying that because of "market forces beyond their control," they are changing my credit-card rate from a fixed 9.9% to a variable rate that's currently 15.9%. What should I do with my $5,000 balance? Will closing my account hurt my credit score? -- Michelle Powell, via e-mail

You don't have to take this lying down, but your options are limited.

You could decline the rate change and continue to pay off your balance at the old rate. In that case, you would need to call Capital One to opt out, and you wouldn't be able to make any new purchases on the card. Capital One would then close your account and notify the three credit bureaus.


Unfortunately, closing the account could hurt your credit score, especially if you've had the account for a long time and have compiled a good history. Says Emily Davidson of Credit.com, "You'd like to stick it to them and close your account, but that could result in some pretty significant damage to your credit score."

One element of your score is based on the age of your oldest card, and another is based on the average age of all your cards. Closing out old cards can hurt both numbers (for more on credit scores, see In Search of the Perfect Score).

Assuming you're not paying a fee on your account, your best bet may be to pay off the balance at the new rate as quickly as possible, then keep the account open but dormant. If you can't afford to pay it off quickly, keep the account open but search a Web site such as Bankrate.com to find a balance-transfer deal with a lower interest rate.

'Yes' to catch-up contributions

Because I will exercise stock options in 2007, I will be considered a highly compensated employee in 2008 and will be able to contribute only about $7,000 to my 401(k). However, I will also turn 50 in 2008. Will I still be able to add the $5,000 in catch-up contributions? -- Russ Williams, McHenry, Ill.

The answer to your question is a surprising yes. Even though your regular 401(k) contributions are limited, you can still make catch-up contributions of up to $5,000 as long as you're 50 or older by the end of the plan year.

My thanks to Tom Anderson for his help this month.