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By HELEN HUNTLEY
© St. Petersburg Times, published May 6, 2001
How much financial cushion is sufficient is subjective
Q. I am a 66-year-old single retiree with a 14-year-old car that needs to be replaced. I have a small fixed-income supplement to my Social Security that is ample for my expenses but not enough to make car payments. I also have about $55,000 in an individual retirement account. Would it be foolish to take some of that money to buy a car and enjoy myself? I hate to think of dying with that money or of having my IRA go to a nursing home should I become incapacitated. What do you think?
A. You ask a philosophical question as well as a financial one. What you really want to know is how much of a financial cushion is enough. No one can answer that for you. Some people think $10,000 is plenty. Others think $1-million is too little. How much money you need can be known only in hindsight.
If you were 80, beginning to gradually spend your principal would be appropriate. But at 66, you are very likely to live at least 20 more years, which means there will be plenty of opportunity for financial emergencies to come along. If you spend your reserves, you leave yourself with fewer options.
You do not say whether your fixed-income supplement increases with inflation. At 3.5 percent inflation, costs double in 20 years. You also do not say whether you own your home. If so, the equity in your home is another financial cushion available to you.
As you think through your situation, here are some questions to ask yourself: Do you need a car or could you use public transportation and take an occasional taxi? Could you buy a late-model used car instead of a new one? Could you get a part-time job that would provide the income to make car payments? If you withdrew money from your IRA to pay for the car, could you rebuild your emergency fund by designating part of your monthly income for savings?
Q. I have purchased bank certificates of deposit for years, but I recently became aware that if you do not renew your CD, you do not receive any interest at all for the period between the time your CD matures and the end of the seven-day grace period for withdrawal. How can banks do that?
A. If your CD contract does not include a promise to pay interest after the maturity date, do not count on getting any. Each bank sets its own policy regarding payment of post-maturity interest. Typically, interest is paid retroactively to the maturity date if you roll over the CD. If you withdraw the money, you usually miss out.
It would not be appropriate for banks to continue paying interest at the same rate after maturity, said Philip Euwer, a senior vice president for AmSouth Bank in Birmingham, Ala. If the old CD rate were higher than current interest rates, the bank would be at a disadvantage, he said.
If you want to withdraw your money, the best approach is to hustle down to the bank and get your money out as soon as your CD matures.
Q. I will turn 70 1/2 in August. My understanding is that I do not have to take a required distribution from my retirement plan until the year following the year in which I turn 70 1/2. However, my brokerage firm has sent me a letter telling me the amount of my required distribution for 2001. Do I have to take a distribution in 2001 or may I wait until 2002?
A. You must take a distribution for 2001, but you do not have to take it during 2001. If you delay, you will need to take two distributions next year: a 2001 distribution by April 1 and a 2002 distribution by Dec. 31.
Consider how the distribution will affect your tax liability, particularly taxation of your Social Security benefits. Some people are better off postponing the distribution, while others are better off taking it.
If you are looking for online help managing a portfolio of stocks or mutual funds, check out FinPortfolio (http://www.finportfolio.com), which offers its basic service for free. You'll get some interactive guidance through the planning process, along with research and screening tools.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to firstname.lastname@example.org by e-mail.