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I know you get more interest if you invest in something where you can’t touch the money for very long periods of time, but the interest is paid into a checking account or something. If I never wanted to touch the money I invested, and just wanted to spend the interest earned, what should I invest in? Mutual funds? Index funds?
El Guapo 3:57 am on March 11, 2010 Permalink
Well, there are several ways to do this. One thing to think about is volatility. If you want to be 100% guaranteed of never losing any of your principal, then certificates of deposit (CD’s) are the way to go. In exchange for security, you will be foregoing the potentially greater growth of different types of mutual funds. Depending on the CD term (6 months to 5 years), they are currently paying around 1-2% per year. If you have a very large amount to invest (over $100K), you may be able to negotiate a slightly higher rate – shop around at credit unions, large banks, and small banks for the best deal.
If you’re willing to handle a little volatility, you could invest in a bond mutual fund. Your principal value will fluctuate slightly (not a lot), and you could expect an average return in the neighborhood of 4-7% annually, depending on the types of bonds the fund invests in.
If you want to be even more aggressive, you could invest in what’s called a balanced fund, which invests in both stocks and bonds. Your principal value will fluctuate more than a bond fund (stocks are more volatile than bonds), but it will be more likely to grow over the long term (5-10 years or more), and it will still kick off some income. You could expect your average total return (income plus growth in principal) to be around 7-9% per year (some years will be more, some less).
If you decide to go the mutual fund route, be sure you choose a good fund company – one with many good fund choices, low fees, and excellent customer service. Based on those criteria, my favorite fund companies are Vanguard, T. Rowe Price, and Fidelity. Their customer service reps will be more than happy to answer any additional questions you may have.
I hope that helps. Good luck!
Age of Reason 3:57 am on March 11, 2010 Permalink
Stocks and mutual funds. That is how an IRA works. You put money in, it is invested and when you retire you live off the income