You're 55 and have $100K to invest. What to do?
Keep your costs down and don't settle for meager returns if playing catch-up.
By Jeff Reeves
One of the best parts about my job is interacting with real human beings who have real financial questions. Last week, I got a good one from a 55-year-old who just got a windfall of $100,000, but never had a penny in his retirement account before this sum.
So ... what should you do?
It's impossible to sum up all the ins and outs of retirement planning in 600 words or so, but here's my basic advice to get you started:
Invest in stocks for growth, investment-grade bonds for safety
A "safe" rule of thumb is to use your age as the percentage of fixed income or bonds you should hold (see InvestorPlace video) -- in your case, 55%. But seeing as you are starting from nothing, I might encourage you to be slightly more aggressive to ensure you grow your money fast enough. $100,000 or even $200,000 won't provide for much wiggle room if you want to retire at 65 and live to be 85.
Keep your costs down
Think about it this way: If you have $100,000, but you pay $2,000 in fees and trading costs and "research," you need to make 2% each year just to break even. If your returns don't justify these expenses, then you're throwing money away. If investing is intimidating, there is nothing wrong with going to a bank or a certified investment adviser to get advice or set up a plan -- but be wary of just giving them the keys to the castle. Sometimes it helps just to pay someone a few hundred bucks and sit down for an hour to discuss your specific situation.
Funds (particularly index funds) are your friend
If you have a basic idea of how to invest, don't feel like you need to craft a crazy portfolio with 20 investments or more. Instead, stick with mutual funds or exchange-traded funds -- preferably low-cost ones that are "passively managed" by being benchmarked to a fixed list of investments. The most popular example is the SPDR S&P 500 ETF (SPY) that charges a mere 0.09% in expenses -- or less than a $1 on every $1,000 you invest. Best of all, it's pegged directly to the holdings that make up the S&P 500 Index. So you get the diversification of all the big-name stocks in there like Microsoft (MSFT), Exxon Mobil (XOM) and Walmart (WMT) -- but you don't have to pay a high-priced manager to pick the right mix. It's built-in diversification, done cheaply. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
Don't overdo it
The biggest problem investors have is that they trade too much or change strategies too quickly. They sell too soon because they are afraid a stock will keep declining, then miss the rebound. They buy a stock too late after it is already up 50% or 100%, then are frustrated when it never moves higher. They pay lots of money for fancy software and active trading … all just to spin their wheels. Research continually indicates that the best strategies are long-term ones, not ones that should change every month based on the whims of the market.
Paper trade before you get complicated
Over time, you may learn enough about the markets to want to branch out from index funds and into direct investment in individual companies. That's great -- but make sure you understand the practical matters of the market before you get over your head. I highly recommend "paper trading" (explained here at InvestorPlace) for a while before making any complicated moves. This involves simply writing down the amount you would theoretically invest and the shares you bought, then tracking the pick over time just like you really owned it. It's often the most instructive way to learn about your investing skills … and best of all, you can make beginner mistakes without losing your shirt in the process!
- Don't have $100,000? Well here's how to invest just $1,000 now. (InvestorPlace)
- If you still don't understand the different asset classes at your disposal, Wells Fargo (WFC) offers a great primer on the basics here. (Wells Fargo)
- How to start buying stocks and funds, and all the options you have to do so. (Investopedia)
Jeff Reeves is the editor of InvestorPlace.com and the author of "The Frugal Investor's Guide to Finding Great Stocks." Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.
More from InvestorPlace
When you think Inflation or worst, a Recession..Invest in things people need not what they might want.
What stores you go to every week, what you buy, what you can do with out? What you have to have?
What comes to your door or your neighbor's door or what they buy..
Restaurants like McDonalds and Yum Brands....Most other restaurants got pounded.
Everyone has to eat, everyone usually wipes their butts and has their garbage hauled, everyone buys fuel until they don't have jobs....But still somethings they can't go without very easy..
Surprisingly tobacco didn't do too bad...But like several other Companies they also had International exposure...Maybe not so good in a few more years...With laws and regs being instituted.
Crazy....Think you are over confident about CHK, but hope it works....Down about 3% Friday.
Carl Icahn and the other guy, wanting to take more control...And more assets to sell, but that can't last forever...Icahn might be the best or worst hope....?? We will see.
And if I had 100K it wouldn't "all" be going there, even with their depressed price.
RoyalFlush....We are betting on Inflationary times again...Goldminers have always been a mainstay with us for almost 10 years...But they have to be TRADED....Have half the positions, we have had in the past right now,may up that??
Walgreens held pretty good in beginning of Recession....Went out, to DCA average other stocks when they went low in Mar. 2009 ?We also had others that recovered well, and the miners; I was trading.
Gold can be traded in a couple of Funds or ETFs also....Best for the beginner, if you are less then knowledgable about Yellow.....Active knows the names, maybe GDX or BGEIX? Not sure there are several now...Same with Silver...? But I do not care for Bullion....Maybe coins ?
The guy is right about WalMart....Just never owned....McDonalds and maybe Dollar type stores.
Inflation proof or near-proof stocks are around in 3-4 Sectors...Recession proof stocks are another story....But I guess there are Inverse Funds and other Instruments?...I don't deal with them and do not have a lot knowledge either...Good luck and as always research,research.
"Paper trading" will never show you the problems human emotions create when real dollars are on the line to lose. Not sure why all these financial gurus seem to think paper trading will teach a newbie anything useful.
Tog, which way do you think they will go, Inflation or deflation?. I think inflation because look how much printing they did to avoid deflation. If they cut to much deflation would bring down real estate and the stock market. I am going with inflation. Sorry bears.
Royal....No I don't think better Dividend stocks are overbought, reason being from what I can gather are many retirees are still scared and have their savings in CDs and cash instruments..BECAUSE,,,,
of what 2008-2009(early)....Did to them....And fears of a Depression.
As soon as we have a deal on the "fiscal cliff" (hopefully) I think you will see a large influx of "sideline cash" back into the Markets....Don't believe they are as worried about paying more on Cap Gains or Div. income..Because they are getting so little now to keep up with inflation or rising costs.
And they may be like us, where much of it (their money), is invested in IRAs or ROTHs....
Which gives you a multitude of tax advantages.
I would look for div payers of 5-6% to appreciate, along with REITS and MLPs,LPs.Just my opinion.
Things like: MO,GE,CAG,WAG, Oil/gas plays, some Retail and Telcoms,that's how we have bet.
Lets face it if your 55 and have 100k in cash you must have done some things right in your life or your parents left you some money.Save 50 grand invest in dividend stocks and wait for the bond market bubble to burst then come in and buy some bond funds for a decent price and rate then hold on to them til you croak.
Yeah it is a lot of Fair-Good-Very Good..Investing advice..Even the 38 and some shells or Vegas.lol.
Guess you really don't want to out live your savings or investments, because then you have to depend on your kids...If you have any ??.....Right now they all seem to be doing fine, BUT also think our Estate is part of their Retirement plan..?
They seem to get more antsy, if we go to Casinos too often, hah,hah...We don't give away the grocery money...And slow down if we lose too often...But normally we stay even or a little ahead of the Game.
We both like to play Poker too...Active.
If you worked hard and saved and/or invested; Are comfortable ?? You better have a little fun before everything goes away...Some people like Cruises, others travel...We have never liked the first, and have done plenty of the second...So nowadays we spend little on either.
The last trip of any expense, our kids got us a few years back...Paid for 4-5 days in Niagra Falls,(a second honeymoon) they even gave us some travel cash...Good kids, we are blessed.
We found 5 Casinos in Canada an Upstate New York..Plus did all the sites,except Maid of the Mist.
So you gotta have some fun too, in your retirement; Don't just die in front of the TV or in front of this screen. On the way back home we played at the MGM in Detroit...So we had a pretty good time.
All good general investing advice. But, here are a few more things to recognize. With inflation at over 2% and rising, healthcare costs rising at 3-4 times the CPI, and 30 year bonds yielding less than 2% after tax, the best safe investment this guy can hope for will still cause the purchasing power of his $100k to decline every year. Riskier investments could cause him to lose half of it in one week during another market crash.
It seems to me the real questions this guy is facing are ones like:
Do I spend the $100k now or save it until next year, when it will only be worth $97k in real purchasing power, and only $80k by the time I can collect Social Security?
Do I save it for my health care needs, knowing it won’t cover 1/3 of the average cost of a major operation even today?
What I’m really saying, of course, is that it doesn’t matter what he does. That’s because $100k today won’t even come close to supporting him at a poverty level in retirement. Unless he’s got another $1-2 million coming from somewhere else, he might as well just spend it now on something that makes him happy.
Stay away from bonds!!!!! Once interest rates go up, which will be soon, the bond market is going to tank.
Might as well just call the IRS and give it to Barry Obama - he's already spent it for you.
Buy a house for 20,000 or less and fix it up.
Get a reverse mortgage.
Prepare your own food. Buy bananas they are better than dog food cost about 15c a piece.
Copyright © 2014 Microsoft. All rights reserved.
Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.