by Archie M. Richards, Jr.
May 21, 2007

Ruth writes, "My husband and I have $525,000 in stocks, bonds, and CDs, all in IRAs. Our income is $100,000 a year. In one of our IRAs we're saving 9 percent of pay, to which an employer adds 1.5 percent. It takes all of our income to pay our monthly expenses. I'm 63. My husband plans to retire in 10 months, when he turns 65 and starts receiving full Social Security of $22,000 a year. Except for the home mortgage, we want to be debt free at retirement. Should we withdraw funds from our IRA to pay off some of the debt now or wait until retirement? Should we continue saving 9 percent in the IRA savings account? Our debts are 2 credit cards, $20,000, auto loan, $24,000, motor home loan, $46,000, and 1st & 2nd mortgages, $100,000."

Ruth, it appears you have $20,000 of credit card debt on which you're paying 18 percent and CDs in your IRA on which you're earning something like 5 percent. You're bleeding money! Get those credit cards paid off immediately from wherever source of money you can muster, probably the CDs.

You're giving me all the more reason to dislike IRAs. To limit current taxation, you avoid making distributions from the IRA. But because of this inflexibility, you're throwing money out the window from high-interest debt.

Plan on having no debt at all in retirement - not even a home mortgage.

As things stand now, you have $525,000 in assets and $190,000 in debts. The difference is $335,000. (Don't consider your house an investment; it's where you live.)

At 5 percent, the $335,000 would pay you an annual income of $16,750. Adding the $22,000 from Social Security gives you $38,750. Is this enough to live on in retirement? If you need more, take other measures now to get all your debts paid off ASAP. Here are possibilities:

• Cut your expenses to the bone? (Buy "America's Cheapest Family," by Steve and Annette Economides.)

• Sell your motor home and use the proceeds to pay off debt.

• Work until you're 70. Then plan on living at least another 30 years.

For additional help, consult www.napfa.org to find a fee-only financial planner.

(This section is wrong. The statement is corrected in a subsequent column.)

Robert writes, "If a mutual fund account of $1000 loses 50 percent in the first year and gains 50 percent in the second year, how would this be reported by the fund?"

It would be reported wrong, Robert.

The correct method is compound earnings. With your assumptions, the account would be worth $500 at the end of the first year and $750 at the end of the second. The two-year result is a loss of 25 percent. The annualized loss is 13.4 percent.

Mutual funds use average earnings. With returns of minus 50 percent in the first year and plus 50 percent in the second, the average earnings is zero. Mutual funds would report no gain or loss.

Average earnings are always higher than compound earnings, based on the same numbers. The higher the percentages, the greater the differential between the two methods.

Since all mutual funds use the average-earnings method, none can afford to buck the trend. Except for people on the ball like you, the public isn't aware of the difference. If one fund family started using compound earnings, its record would appear worse than that of the competition, even though it isn't. But as long as all funds use the same method, they can still be compared one to another.

In my 4/2/07 column, I advised choosing a home mortgage with higher points and a lower interest rate. Matt has pointed out that this may not be true if you expect to own the house for a short time.

Matt is correct. But I might add that if you know in advance that you'll be a short-timer, consider renting instead. Buying and selling houses is costly.