Q. My husband is 60 and has $70,000 in a 401(k). He puts 15 percent of his paycheck into it and his company provides a 67 percent match. He makes the majority of our income, which is about $70,000 per year. Should we pay off a $40,000 loan that has a 7.9 percent interest rate? (We also have a mortgage for $54,000.) —C.W., by email
A. While it makes sense to pay off a 7.9 percent loan if you can, doing it from a qualified plan doesn’t work very well. Paying all of it at once could put you in a higher tax bracket. Your current income is taxable at a maximum of 15 percent. But if you add a $40,000 withdrawal to that income, part of it will be taxed at 25 percent. So you’d be saving 7.9 percent interest by paying an additional 10 percent in income taxes.
It also doesn’t make much sense to do it by borrowing from your 401(k) either— loans from 401(k) plans are supposed to be for “hardship” circumstances.
An alternative would be to explore a new home mortgage or a home equity line of credit. Either might be at a lower interest rate than your current mortgage. And the total monthly payment might not be much higher. That would allow you to keep the 401(k) intact. Then you could focus on saving as much as possible between now and actual retirement.
Q. I look forward to reading your advice but most of the time it does not apply to me. Your recent comment on the TSP and money advisers was right on the mark. I am recently retired from federal employment, with 37 years service. I am 59 years old.
I have some money in the TSP. When I was much younger I had money in many of the funds and did fairly well. But as I got older I moved all of the money to the G Fund. It doesn't make much, but it doesn't lose much. I have not drawn on the account yet. But I will need to make withdrawals fairly soon because there are shortfalls each month.
My question for you is this: should I move any, or all, of the money to the L Fund, or any other fund? The goal would be to try to offset my withdrawals.
Or should I just stay with the G Fund and continue the same path? A return of 6 to 8 percent would offset my projected withdrawals. The G Fund generally makes about 2 to 3 percent.
Several people have tried to lure me to the expensive managed funds that you have written about. —K.F., Waco, TX
A. The safety of the G Fund is a real boon for federal employees. I believe the recent performance was a return of about 2.3 percent. That’s not impressive, until you consider the yields on just about everything else.
Studies of portfolio survival— whether a portfolio will last for 30 years at different rates of withdrawal— have consistently shown that a portfolio that is between 50 and 75 percent stocks has a higher chance of survival than one that has less, or more, stocks. The L Income Fund, one of the lifecycle funds, is only 20 percent stocks— not enough to maximize survival odds.
If you shifted about half of your current investment, over time, into the C Fund you would have what I call the basic Couch Potato portfolio. The C Fund is invested to duplicate the performance of the Standard and Poor’s 500 Index.
Yes, it will sink in bad markets. But it also rises in bull markets. When stocks are down you can make your annual withdrawals from the G Fund; when stocks are up you can make your withdrawals from the C Fund. The only other action you need to take is to rebalance every year, getting the portfolio back to a 50/50 mix.
Had you done this over the 10 years ending December 2013, your annualized return from the C Fund would have been 7.44 percent, in spite of a major loss in 2008. The annualized return of the G Fund over the same period was an annualized 3.39 percent. That’s a big return difference when compounded over 10 years. And that’s why we all need to take some level of risk in our retirement investing.