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December 30, 2012

Better safe -- and balanced -- than sorry

My wife and I are 70, and we have $950,000 in annuities in the market, plus $68,000 in our emergency fund. The only debt we have is our mortgage. I’m considering converting our stocks to a money market account to lower the risk. What do you think?

There are two sides to this. One is the asset allocation method, where as you grow older you move away from equities like mutual funds toward safer, more conservative investments like money markets, bonds and certificates of deposit. This is standard financial planning theory.

I disagree with that theory, and here’s why. Statistics show that if you make it to 72 years of age and are in good health, you have a high probability of living into your nineties. If you’re making around one percent on your money market and inflation is four to five percent, then your money isn’t going to be worth a lot. You need to outpace inflation, at least with your investments, in order to break even.

You might move some cash over to money markets and CDs for your own peace of mind, but I’d also recommend growth and income mutual funds along with some balanced funds. You want the entire group to be hitting the four to five percent range over the next several years, so you can at least keep up with the rising costs of gas and bread.

In my mind, you’re avoiding one type of risk by moving everything to money markets, but you’re taking on a different kind of risk—the chance you’ll get tackled from behind by inflation. My advice is to balance things out so you can sleep better at night, but at a pace where you and your money stay ahead of the curve!

My wife just had our first child. As a result, we now have $2,500 in medical bills not covered by insurance. We’ve got $7,000 in our emergency fund, and I make about $25,000 a year. Should we dip into our savings for this or set up a payment plan with the hospital?

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