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I have money to invest for my retirement but I have no clue where to place it to have it work for me. I recently learned that $3,000 can turn into $375,000 over 30 years, and I have exactly that amount to invest rather than having it sit in a savings account. What should I do with this money? – Mikio

Mikio,

These days, I think you’ll have trouble earning that much on an investment. You’d need to earn between 17% and 18% annually on your money, which is a little unrealistic. Investing is something done over time – you don’t want to just put $3,000 into an account and never look at it again. Instead, you should open an account with that $3,000, and then add a little more automatically each month so it can grow. So take a look at your current situation. Do you have at least 6-9 months in an emergency fund? Is your high-interest debt paid off? If you answered “yes” to these questions, you can to consider putting that $3,000 into a retirement account like a 401(k) where the money can grow tax-deferred until retirement  – if you have one at work — or a Roth IRA where the money can grow tax free forever.

Your underlying question though, is in what do you invest the money in order to make it grow over that 30-year time period.  I’d suggest a target-date retirement fund.  This is a mutual fund managed based on your retirement date (you choose a fund with the date in the title that is approximately when you are going to retire, 2030, for example or 2040).  Then the manager of that fund takes fewer and fewer risks as you get older so that if the market takes a dive right before you retire, you’re not in such a precarious position.  For most people this works much better than trying to pick a few stocks yourself.  The folks at the Employee Benefit Research Institute recently analyzed 24 million 401(k) retirement accounts.  They found that 21 percent of people 10 years away from retirement had 90 percent of their money in stocks.  That was way too risky and when the markets cratered they got creamed.  The people who’d gone the target-date fund route had 51 percent of their money in stocks, 10 years away from retirement.  The market collapse hurt them, but not nearly as much.

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My father in law gave us 10,000 dollars as a gift. What should we put it in? Maybe a CD? I also want to start a college fund, but I don’t want to pay a penalty if my daughter doesn’t go to college, or wants to go to a trade school. – Mary, New Jersey

Mary,

That all depends what the money is for. Usually, when you have a large sum of money, you’ll want to choose to either save it or invest it – unless you have a large amount of debt to pay off at high interest rates – then, you might want to put it towards paying down some of those bills. It can help you alleviate some of the monthly pressure, too, that happens when you have high-interest debt.

A CD can be a good option if you think you’ll use the money in the short-term – say within the next three to five years. If you have plans to put a down payment on a home or a car, or are looking to make another big purchase, you don’t want to risk losing principal.   You probably won’t earn much – according to BankRate.com, interest rates on a 1-year CD are averaging around .69% nationally – so either keep your money very short-term (say 6 months to a year) so you can reinvest when interest rates jump or look into the adjustable CD from ally bank.

If it’s for your child’s college fund, I’d put it in a 529 college savings plan (go to savingforcollege.com to find the best one for you). The great thing about 529 Plans is that they can be used for traditional colleges and universities, as well as for trade schools. And if you have more than one child, and one chooses not to go to college, you can put that money toward your other child’s education. For more tips on choosing a 529 plan, check out the article I wrote a couple of weeks ago here on my blog.

Next, check your emergency fund. I suggest having three to six months of living expenses in a savings account to use in the case of a financial emergency. Setting up and maintaining that emergency cushion is important. You should take a look at what you spend, roughly, each month on your housing, transportation, debts, and general living expenses, and if you don’t have at least a few months’ worth in a savings account, allocate some of that $10,000 there.

If you’re saving for longer-term goals, like retirement, then it’s okay to invest it in something a little more risky — like a stock market index fund — knowing you’ll eventually get more growth but you may have to ride the ups and downs of the market before you do. “Putting money away toward retirement is always a good move,” says Diedra Fulton, a Dallas-area fee-only certified financial planner. “Contribute the maximum amount to a ROTH IRA for 2010, if eligible, based on income,” she adds, “which is $5000 annually if you’re under 50, and $6000 if you’re 50 this year and older.”

If you’re well funded in each of these areas, and still have some leftover cash, have a little fun! “Consider using a small portion for taking an unplanned trip, splurging on a personal reward, or addressing some other ‘luxury’ you had not anticipated incurring expenses for,” says Fulton. Unless you’re in a dire financial situation, it’s okay to spend a little.

WHO:

WHAT: Oculus Partners

WHERE: Atlanta, GA

WHEN: 2008

HOW: Some people, when they think of retirement, think of golfing, beach houses, and sleeping in – a far cry from Cynthia Hayes’ retirement dreams. They included launching a business that, not so coincidentally, would help others save for and achieve their own retirement goals. “I was feeling a bit uninspired and unfulfilled,” says Hayes, formerly a Managing Director at Merrill Lynch, “plus, I had always targeted age 55 as the time to do something on my own.” So when Merrill offered her a voluntary early retirement in April of 2008 – months before she had planned to make the jump – she leapt and started work on her new project. One full day (literally), some phone calls, and a Linked In account later, Hayes was in business. “I have always played a leadership role in the retirement industry, and have wisely always cultivated a wide network of contacts,” Hayes says, “and Merrill Lynch also wanted to continue to use me in a consulting capacity.” This gave her a strong running start into entrepreneurship – which, in turn, helped her battle the looming recession. “In hindsight, had I known that the economy and the housing market were going to have a melt-down, I’m not sure I would have jumped when I did,” says Hayes.

Nonetheless, she didn’t turn back. She invested $50,000 to get the business off the ground then turned to building both her client relationships and her pool of internal resources. “I reached out to talented colleagues I knew who were in similar situations,” says Hayes – knowing many who had recently retired, had been downsized out of their jobs or were simply looking for another work environment.

It’s going well. Since the business launched in June of 2008, Hayes has grown from being a one-woman business to one with 18 full-time consultants and annual revenues of $7 million. “We’ve been adding one or two [consultants] every month,” she says. “I’ve been able to re-engage a number of very talented people who have a lot to give the industry and the clients – and I’m proud that I’ve been able to tap into such a strong talent pool.”

Working with companies that “truly want to save the world” – something Hayes says of herself – brings out the best in everyone involved. The company is gradually expanding by developing a referral plan that heightens their networking throughout the industry, and has also invested in a software company that helps people find a way to balance their finances as they move toward retirement. Oculus Partners is also developing a broker/dealer firm they hope will “help better connect Wall Street to Main Street,” in terms of helping people develop sound investment packages that will guide them into a secure retirement. “I have always been passionate about helping people create the most financially successful life they can with the resources they have,” says Hayes. “Everything we do, and every client assignment we’ve taken has all been around that passion.”

HER ADVICE: “Do your homework and don’t be afraid,” says Hayes. “it pays to have a business plan, target audience, and a value proposition. You’ll have to develop a lot of new skills and knowledge very quickly, so leverage free expertise wherever you can.” Hayes adds that time management is also essential. “It is easy to focus on the tasks you love and forget those that are critical. Keep a schedule and a to-do list of short, medium, and long term tasks and balance your time and focus across them.”