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I’m 38. Mortgage free. I have $150K in my children’s college fund. I contribute the max to my IRA. I invest in zero-coupon municipal bonds that are AA/AAA rated and insured. I’m pretty conservative and refuse to invest in the market. Any retirement tips?


If you live debt free, including owning your home outright, and have socked away so much cash for your kids’ education and even more for your retirement, you’re doing very well already. What would help in your retirement planning is to realize that your words say you’re conservative, but your actions say otherwise. Putting so much of your liquid net worth into one asset, municipal bonds, and refusing to invest – at all, ever, no way – in the stock market is risky and unwise on two counts.
First, stocks have generated higher long-run returns than any other major asset class. By avoiding them, you’re limiting the opportunity for your retirement fund to accumulate sufficient capital to provide income for you to live comfortably in retirement. Until you change jobs and are able to contribute to a 401(k), you will be saving precious little, at least in tax-favored vehicles, so producing safe, healthy long-term returns on what you do set aside is paramount.
More important, you’re not diversified. Your eggs are mostly in one basket, and that basket has looked kind of leaky and threadbare lately. Municipal bonds have been among the weakest performers since last fall, while the stock market that you hold in such disdain has soared. Those trends can reverse, of course, but that’s the point: If you hold a mix of investments, you’re not at the mercy of any one of them and are in a position to generate higher over-all returns with more muted swings. With the stock market having doubled in just over two years, a wholesale switch out of munis and into stocks isn’t advisable. At some point, though, stocks will correct and munis will recover. If and when that occurs, you might want to gradually sell some of your munis and invest in mutual funds holding domestic and foreign stocks, corporate and government bonds and commodities.
-Conrad de Aenlle