Got Cash? Which Investments to Tap When You Need Money

Whether you're hit with an unexpected medical bill or need money to pay the mortgage after losing your job, there may come a time when you have to tap your emergency savings and investments to get the cash you need, especially in today's tough economy.

Here are options to consider when you're hard up for quick cash:

• Savings Account

This is your most liquid investment and should be the first place you turn. Sure, you lose opportunity to earn interest but with savings account rates at paltry levels, you're not sacrificing all that much.

• Money Market Account

You're next stop is your money market account or money market fund. Beware that a heavy withdrawal could trigger a fee if you draw your balance below the minimum requirement for your account. Money market rates are usually higher than conventional savings account rates, yet in today's environment they're still low enough that you're not giving up a lot of interest earnings to get the cash you need.

• CDs

Check whether any of your CDs are close to maturity. Chances are good that a certificate of deposit will mature soon if you've set up a strategic CD ladder. A CD ladder features multiple CDs with staggered maturity dates to provide steady access to cash. You lose three months of interest earnings if you cash in a traditional CD before the maturity date, unless it's a no-penalty CD, which lets you cash in early without paying a price. More exotic CDs, such as long-term indexed CDs, are less liquid -- you forfeit principle as well as interest if you cash them in before maturity. Make these your last resort if you plan to raid CD investments.

• Savings Bonds

Savings bonds earn interest for up to 30 years, but they can be cashed in long before then. You must hold savings bonds for at least a year, and you pay a three-month earnings penalty if you cash them in before five years.

• 401(k) loan

Federal law lets you borrow up to $50,000 or half of your 401(k) account balance, whichever is less, if your plan allows loans. A loan is a better option than an early withdrawal. You pay income tax plus a 10 percent tax penalty on a withdrawal if you're under 59 1/2. You pay no tax penalty for taking out a loan. Still, there are some tax consequences. You repay the loan plus interest with after-tax money. Then when you're retired, you pay taxes again on that amount when you withdraw, so in essence the money gets taxed twice. In most cases you must repay the loan within five years on an amortizing basis. You don't have to undergo a credit check or explain how you plan to use the money when you borrow from your 401(k), making it an attractive alternative to a bank loan. (You can't borrow from an IRA.)

• Other Investments

Other investments, such as stock and real estate, are possibilities, but you may not get the price you want if you have to sell quickly, and in the tough real estate market, you might not be able to unload property in a timely manner, period.

• Home equity loan

Got equity? Count yourself among the lucky ones who aren't underwater on their mortgages. Interest rates on home equity loans are low these days, and in many cases you get a tax deduction from interest paid on home equity loans, but approach with caution. You could lose your home if you default.

Meanwhile, avoid getting in deep with credit cards, which carry high interest rates for purchases and even higher rates and fees for cash advances.

Your Retirement Investments: The Major Milestones

You pass a number of important milestones on your way toward retirement. Here are the big ones to keep in mind as you manage investments:

Boost Investments by Saving To the Limits: 49 and Under

Current tax law lets you contribute up to $16,500 to a 401(k), $5,000 to a traditional or Roth IRA and $11,500 to a SIMPLE IRA plan this year. Save as much you can up to the limits, and by all means save at least up to your employer's 401(k) match if you're lucky enough to have one. Otherwise you leave money on the table.

Make Up For Previous Low Savings Rates and Play Catch Up: Age 50 and Up

Government tax provisions let you contribute even more to tax-deferred retirement plans. This year you can put an extra $5,500 into a 401(k), another $1,000 into a traditional or Roth IRA and an additional $2,500 toward a SIMPLE IRA. Not all 401(k) plans allow catch-up contributions, though, so check with your employee benefits department to learn the rules for your plan.

Distribution Tax Penalty Lifts: Age 59 1/2

Before age 59 1/2 you pay a 10 percent tax penalty for taking early withdrawals from tax-deferred plans. You still must pay taxes on the income for whatever you withdraw from tax-deferred plans, but you don't pay the early withdrawal penalty starting now.

Social Security Kicks In: Age 62

The earliest you can receive Social Security retirement benefits is 62, but the government doesn't consider 62 full retirement age, so your monthly benefits are reduced by 20 percent to 30 percent, depending on the year you were born. If you were born after 1960, for instance, your monthly benefit is cut by 30 percent.

You still can receive Social Security benefits even if you continue working, although benefits are decreased by $1 for every $2 you earn above the annual limit, which is $14,160 in 2010. In the year you reach full retirement, your benefits are decreased by $1 for every $3 you earn above a higher limit, which in 2010 is $37,680. Then, starting in the month you reach full retirement age, there is no limit on your earnings for receiving your full Social Security monthly benefits.

Medicare Eligibility: Age 65

Sign up for the Medicare hospital insurance plan (Part A) within 4 months of your 65th birthday, regardless of whether you begin receiving retirement benefits. You have the option of signing up for the Medicare medical insurance (Part B), which covers doctors visits and other medical services not covered by Part A, and drug coverage (Part D). Unless you're covered by an employer's plan, you have three months within your 65th birthday to sign up for these parts. Don't delay, or you could pay more for the benefits down the line.

If you stay on an employer's plan, you can sign up for Medicare medical and drug coverage within eight months when you leave your job or the employer's coverage ends without facing any additional costs.

Full Retirement Age: Age 67

Your full retirement age -- when you can receive full Social Security monthly benefits -- varies according to the year you were born. If you were born in 1955, the full retirement age is 66 and 2 months. Those born in 1960 or later reach full retirement age at 67. You can delay taking Social Security benefits to increase your monthly benefit until age 70. After that, there is no financial incentive to delay.

Mandatory Distributions from Retirement Investments: Age 70 1/2

You must start taking minimum distributions from tax-deferred retirement accounts starting at this age, or face a hefty tax penalty. Roth IRAs don't require minimum distributions because contributions are made after taxes.

Keep these milestones in mind as you manage your retirement investments, including stock portfolios and cash accounts, such as CDs, high yield savings accounts and money market accounts.

5 Good Reasons to Delay Retirement

The dream of retiring while still young and fit enough to enjoy it is fading for a growing number of people hit hard by the tough economy.

Roughly a third of Americans worry they won't have the means to finance their retirement, according to a recent survey by the Pew Research Center's Social and Demographic Trends Project.

And many who already have reached retirement age are putting it off. About a third of working adults 62 and older say they already delayed retirement, the survey found, and about 60 percent of workers in their 50s report they might have to work longer than they had planned.

Other studies show similar worries. About 60 percent of adults recently polled by Allianz Life Insurance Co. said they were more afraid of outliving their income than dying.

Perhaps what's most troubling is the fear of running out of money appears to be well-founded.

In a recent analysis, the Employee Benefit Research Institute projected a disturbing portion of Americans will be short on savings after retirement. Almost two thirds of Americans in the two lowest preretirement income levels will be short of money after 10 years of retirement, and a third of people in the next-highest income level will be short after 20 years in retirement. Even upper-income folks aren't immune -- 13 percent of them will face money shortages 20 years after they retire, the institute reported.

The decision to delay retirement might trigger disappointment, perhaps deep disappointment, at first. But it's not the end of the world. Here are five reasons delaying retirement might not be such a bummer after all:

1. Bigger Social Security Monthly Benefit

The longer you work, the bigger your Social Security monthly benefits will be.

If you retire early, the monthly benefit amounts are smaller to account for the longer period you receive them. When you retire later, you get benefits for a shorter period of time but the monthly amounts are bigger to make up for the time you didn't receive anything.

2. More Time to Fund Retirement Investments

Working even just a couple more years will help you offset losses to your portfolio when the economy tanked. The more time you work and save, the bigger your nest egg will be.

The federal government lets you put in extra money to catch up on retirement if you're 50 or older. This year that means you can add an extra $5,500 to your 401(k) -- on top of the $16,500 you're already allowed to contribute -- and another $1,000 on top of the $5,000 contribution limit for a traditional or Roth IRA. For a SIMPLE IRA, you can add in another $2,500 on top of the $11,500 limit.

3. Save Money by Not Withdrawing from Investments

Continuing to work means you don't draw from your retirement savings, which preserves your nest egg, allowing it to grow. You save tens of thousands of dollars just by not withdrawing from investments for a year or two.

4. More Time to Pay Off Mortgage

Consider working a few extra years to pay off your mortgage before you retire, if you haven't already done so. Remove debt to lower your expenses and give you greater financial freedom once you're ready to quit working.

5. Work Satisfaction

Retirement isn't always what it's cracked up to be. A University of Maryland study that tracked 12,000 workers ages 51 to 61 found that people who scaled back, but continued to do some work in their field were happier and healthier than those who stopped working completely. Those who only scaled back their work reported fewer major ailments like heart disease and depression. If you still need some income, but perhaps not your full salary, consider downsizing your job to reduce stress but maintain connection to your career and satisfaction from contributing.

Delaying retirement might not be what you dreamed for yourself at this age, but using the time effectively to save and preserve investments will help you feel secure when it's finally time to call it quits at work.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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