Personal Finance

Money Matters: Investment advice for a retiree living on a pension

Q. I’ve recently retired and I am living on a pension. I would like to have an additional $6,000 a year to have a comfortable life in the next 10 years. After that my Social Security income will kick in, then I should be OK. My question is where I can put $60,000 now to have a stable income of $6,000 a year in the next 10 years. Interest rates are so low should I invest in the stock market?

A. Interest rates have to rise someday but people have been saying that now for several years.

The simplest action to take would be to place the money in a savings or money market account and withdraw $6,000 a year for 10 years. There are some online banks paying 1 percent interest on deposits of any amounts. If the interest rate were to remain at 1 percent and you withdrew $6,000/year, you’d have a little over $2,900 remaining at the end of 10 years.

A slightly more complex approach would be to ladder Certificates of Deposit (CDs). The same online banks are offering 1-year CDs with a 1.30 interest rate, 2 year at 1.52 and 5 year at 2.25. Take your first $6,000 and place it in the savings or money market account and then consider dividing the remainder as follows: $6,000 in a 1-year CD, $18,000 in a 2-year CD and $30,000 in a 5-year CD. In 2016 when the 1-year CD matures (value $6,078), use that money to supplement your pension and when the 2-year CD matures in 2017 (value $18,551) use $6,183 for living expenses, buy a $6,184 1-year CD and a $6,184 2-year CD. Use the 1-year CD in 2018 (value 6,264) and the 2-year CD (value $6,373) in 2019. In 2020, the 5-year CD matures and is worth $33,530. Repeat the process above for the next five years.

If you are willing to take some risk you could invest in a moderate allocation mutual fund. Moderate allocation just means a combination of stocks and bonds. Purchase CDs as outlined above but put less in the 5-year CD. Invest $10,000 to $20,000 in a highly rated no-load fund. Morningstar is one of the oldest fund rating companies and they use a star system with 5 stars being the highest rating and 1 star being the lowest. Funds are rated using a variety of factors including risk and performance compared to other funds with a similar investment objective. No-load means that when you purchase the fund there are no up-front, back-end or continuous 12-B1 sales charges. Look for a fund with a relatively low expense ratio, which means that the internal costs of operating the fund are lower than the average of around 1.4 percent.

An example of a no-load moderate allocation fund is T. Rowe Price Balanced fund, ticker symbol RPBAX. It’s expense ratio is 0.60 percent and it has a steady 4 star rating from Morningstar. The fund’s 1 year annualized return is 2.98 percent, 3 year 8.30 percent, 5 year 8.89 percent and 10 year 6.56 percent.

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