I need a retirement savings plan. My employer doesn’t offer one.

(Hint: put your eggs in more than one basket)

1. Stock of the company you work for, which has an expected return of 6.4% above inflation.
2. A mutual fund invested in stocks, which has an expected return of 6.4% above inflation and management fees.
3. Stock in General Products, a large multi-national, which has an expected return of 6.4% above inflation.

Answer: 3. The mutual fund. These investments all have the same expected return. So go for the surest return.

There are no guarantees in the stock market and the performance of individual stocks is highly unpredictable. For example, suppose the following two charts track the price of Your Company’s stock and the stock of General Products over a 10 year period:

Your Company’s stock did better over this 10 year period. However, that might not be the case going forward. Because the mutual fund holds stocks in many companies, you were more likely to get the returns you expect, and get what you expect going forward.

The riskiest investment is stock in Your Company. Why? Because if things go badly your job is at risk, as well as your savings.

(Hint: One Size Doesn’t Fit All)

1. A mutual fund invested in stocks.
2. A mutual fund invested in bonds.
3. A mix – some in stock and some in bond mutual funds

Answer: 3. A mix (in most cases).

You need your savings to grow, so when you retire you’ll have enough to pay the bills, and stocks have higher expected returns than bonds.

But bonds are safer, and you need your savings to be there when you retire.

(Hint: is one “no-brainer” always best?)

1. A 401(k) with no employer match.
2. A 401(k) with an employer match.
3. Paying off credit card debt.

Answer: 2 or 3. A 401(k) with an employer match, or paying off credit card debt.

A 401(k) with a match is better than a 401(k) with no match.

But whether it’s better than paying off credit card debt depends on:

• The size of the match. The larger the match, the better the 401(k)
• Taxes. The higher your tax bracket today, and the lower your tax bracket in retirement, the better the 401(k).
• How long it would take to pay off the debt. The longer it would take, the better to pay it off quickly.

Peace of mind. The more peace of mind that would come from getting out of debt, the better to pay it off quickly.