Adding pizzazz
Where to put $5,000: Now that you're a seasoned saver, you have a rich menu of investment options to consider. Crucially, that next $5,000 can make your portfolio safer in your pre-retirement years.
By Michael Sivy and George Mannes, MONEY Magazine

NEW YORK (MONEY Magazine) - You've created a diversified portfolio and built up your retirement accounts. Now, with a fresh $5,000, you have the flexibility to do all sorts of fine-tuning.

Four questions to get you started:

1. Are you over 50? As you get within a decade of retirement and your priorities shift from building your wealth to making it last, income investments become more important. They lower your risk and can be a steady source of cash later. Bonds are the obvious way to add income. But you can get about as much income today, especially after taxes, by buying high-dividend stocks. See "Income, no bonds," below.

2. Are you in the 25 percent tax bracket or higher? Bonds boost your income and lower your risk, but you have to pay a full load of taxes on them. You would likely do better in municipals. See "Income, no taxes," below.

3. Are you willing to devote more time to your investments? Lots of investors reach their goals using funds alone, but buying individual blue-chip stocks can cost you less in fees and taxes. Just make sure you have the time and inclination to research and track them, as well as the fortitude to ride out short-term losses. For the names of eight stocks that look especially timely now, see "Build wealth" below.

4. Do you worry about oil prices, inflation or recession? With less time before you tap your funds, it's tougher to recover from an unexpected loss. A diversified portfolio should protect you against a sudden shock. But adding certain stocks or funds can fortify you even more against specific threats. See "Disaster Defense."

5. Do you plan to leave money to your kids? As long as you don't need another $5,000, consider giving money to the kids now so you can have the pleasure of watching it be put to work. Or play.

What you can do:

Income, no taxes Best $5k choice: T. Rowe Price Tax-Free Income (Research). T. Rowe Price Tax-Free Income (800-638-5660), which invests in high-quality municipal bonds, now yields 4.4 percent, which works out to 5.9 percent if you're in the 25 percent tax bracket.

Income, no bonds Best $5k choice: iShares Dow Jones Select Dividend Index (Research). This ETF is a low-cost way to own a wide variety of high-yield stocks, financial services and utilities in particular. Recent yield: 3.1 percent. Plus, dividends are taxed at a lower rate (15 percent) than bond income. And the growth potential is better than with bonds.

Disaster defense If you've been reading about economic threats and feel exposed, you can add extra protection for three specific risks.

  • Inflation. Best $5k choice: T. Rowe Price New Era (Research). Consumer prices have risen 3.6 percent over the past year, and many analysts think they are headed a lot higher. Even 4 percent inflation makes it harder to save enough for retirement. You can offset that risk by buying New Era (800- 638-5660), which owns natural resources and energy stocks.
  • Oil Shocks. Best $5k choice: Anadarko Petroleum (Research). Demand for oil is soaring in China and India. That alone could mean much higher energy prices, which could depress the economy. You can hedge by buying Anadarko. One advantage is that 85 percent of its reserves are in North America, which means that, unlike companies with wells in the Middle East, it can't be hurt badly by foreign unrest.
  • Recession. Best $5k choice: Vanguard Long-Term Treasury Investors (Research). The first thing new Fed chairman Ben Bernanke did was hike rates to forestall inflation. Trouble is, if he raises interest rates too much, he could tip the economy into recession. If you think you can't ride out such slumps, put part of your money in a long-term bond fund like Vanguard Long-Term Treasury Investors (800-851-4999). Its value will rise when rates fall during a slowdown.

Tough call: Buy a vacation home or stocks?

Second-home prices have been on the leading edge of the real estate boom. Should you buy in now?

Why real estate:

  • It's easy to get your kids to visit if your house is on the beach.
  • You can deduct mortgage interest and property taxes, just as with your first home.
  • There's an indescribable satisfaction to owning, not just visiting.

Why stocks:

  • If you pay cash for the home, you'll be left with a smaller pool to live off.
  • Borrowing adds to your expenses. Though beachfront prices have zoomed, you can't bank on more of the same. You're kidding yourself if you think this is just another retirement investment. "There could be 10 years of no appreciation," says financial planner Richard Schultz.
  • It's easier to draw income from stocks.

Bottom line: If you have to ask yourself whether you can afford the house, don't buy it. If you can measure the time that you will spend there every year in weeks, not months, stick to stocks and make your getaway a rental, not a purchase.

Out of the box idea: Give it away

You can pass on $11,000 a year to anyone ($22,000 if you're married) without incurring a gift tax. If you give them money now, you get to see them enjoy it. If you wanted to leave money to your kids anyway, why wait?

Click here to see eight blue chips for your golden years.

Worried that you haven't saved enough for retirement? MONEY Magazine is looking for people between the ages of 50 and 60 who have saved less than $50,000 in their 401(k), IRAs and other retirement accounts and are interested in sharing their story and getting some financial advice about their situation. Please e-mail: Top of page

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