I earn $120,000 a year and have $165,000 in savings. How do I invest in this high-interest-rate environment?

By Quentin Fottrell

'My husband and I would like to provide our new baby with the best life we can'

Dear Quentin,

I am 34 and married, with a 5-month-old baby.

I earn about $120,000 per year. My husband is 38 and earns about $80,000 to $90,000, depending on his commission. We have no debt except a monthly credit-card balance, which we pay off every month. We have $120,000 in my 401(k), $105,000 in a Robinhood account, $60,000 in savings accounts and $10,000 in a checking account.

I contribute $1,000 to my 401(k) every month and $1,000 to my Robinhood account, which is set to purchase a few ETFs every week. We both put money into our shared account (I put $3,000 and he contributes $2,400). Also, we are fortunate that my wealthy uncle gives the two of us $15,000 as a Christmas gift every year.

'With our current financial situation, what would be the best move so we can buy a house, save and retire at 65? '

I heard that investing in a Roth IRA is a great idea, although there is a contribution limit, and also heard that instead of using Robinhood, it is better to have an account with Vanguard or some other brokerage account. With our current financial situation, what would be the best move so we can buy a house, save and retire at 65?

Our house budget is $400,000 to $450,000 in Washington state. How can we best invest money in this high interest-rate environment? Should we open a Roth IRA or do you have any other options? My husband and I would like to provide our new baby with the best life we can and I want a stress-free retirement.

New Mom

Related: 'I have been propping her up for 15 years': My niece, 35, is horrible with money. How can I help her become financially responsible?

Dear Mom,

You've come a long way, already.

The earlier you buy a house and pay off the mortgage, the better placed you will be for retirement. With a dual income, you should be able to overpay as your incomes rise, in addition to using any inheritance to pay off your mortgage (keeping in mind that for married couples, inheritance is deemed separate property). For a home worth around $425,000, you would end up paying $2,262 a month for a mortgage with a 7% 30-year interest rate, and would need $85,000 for a 20% deposit to avoid paying private mortgage insurance.

Take your time, like all those other would-be homeowners, and see what happens to rates over the course of the year. Many economists say a 5% 30-year mortgage rate would be enough to get people to start buying again. The advantage is that you will have a lower rate. The disadvantage, of course, is that there will be more competition for properties and, as a result, some real-estate experts expect house values to increase if or when interest rates fall, to say, 6% or thereabouts by the end of this year. With uncertain geopolitical events, nobody knows for sure.

Here is a quick-and-dirty laundry list for investing in a high-interest-rate environment: Consider shorter-duration bonds, mutual funds and exchange-traded funds, with a maturity of less than five years; high-yield savings accounts; certificates of deposit; Treasury inflation-protected securities (TIPS) - inflation-protected bonds issued by the Treasury; and that magic word - diversification. Morgan Stanley (MS) cites opportunities in "value-oriented and defensive sectors." My colleague Jeremy Owens discusses these issues in his "On Watch" podcast.

Another option: Health Savings Accounts (HSA) allow you to save money in a tax-advantaged account and withdraw it tax-free for qualified medical expenses. You can also use that cash to reduce your out-of-pocket medical expenses in retirement. HSAs are, essentially, one way to build a "medical nest egg" over your lifetime, depending on how much you use during your working life. For 2024, individuals under a high-deductible health plan (HDHP) have an HSA annual contribution limit of $4,150. The HSA contribution limit for family coverage is $8,300.

If I could give one piece of advice to my younger self, it would be to focus on the long race, not the short twists and turns, bumps and potholes.

The Roth IRA contribution limit for 2024 is $7,000 per person - and anyone else under the age of 50 - with an additional $1,000 catch-up contribution for people who are 50 and older. Single tax filers must have a modified adjusted gross income (MAGI) of less than $153,000 a year in 2023 or $161,000 a year in 2024. If you are married and filing jointly, your MAGI must be under $228,000 in 2023 and $240,000. (Read more here.)

"You can convert funds in pretax IRA accounts to a Roth IRA," says Timothy Speiss, tax partner in EisnerAmper's Private Client Services Group. "This includes traditional IRAs, SEP IRAs and Simple IRAs. However, if you convert pretax money in a regular IRA to a Roth IRA, you have to pay taxes on it at your current rate. The conversion amount is treated as regular income, which can bump you into a higher tax bracket and cause a high tax bill for the conversion year."

Considering the tax rules, a Roth IRA conversion can be worth it for a couple of reasons, he adds. "First, it can get around the income caps that limit Roth conversions for higher-income taxpayers. There are no limits on conversions, though. A taxpayer with a pretax IRA can convert any amount of funds in a year to a Roth IRA."

"Roth IRAs also are exempt from required minimum distributions (RMDs)," Speiss adds. "These mandatory withdrawals from retirement accounts begin at age 73, and can create a tax burden on affluent retirees. But Roth owners don't have to take RMDs for as long as they live, making Roth IRAs particularly useful for leaving inheritances."

Age vs. risk tolerance

You have every reason, at your age, to play it safe. Robinhood versus Vanguard - or some other brokerage account from one of the world's largest investment companies - depends in part on your investment style and risk tolerance. Robinhood investors receive flack for meme-friendly investments and an emotive investing style, while older investment firms are more known for their buy-and-hold strategies, but one COVID-era study found that Robinhood investors collectively increased their holdings during the March 2020 bear market, "indicating an absence of panic and margin calls."

"Their steadfastness was rewarded in the subsequent bull market," the report, carried out by Ivo Welch, a finance professor at UCLA's Anderson Graduate School of Management, found. "Despite unusual interest in some 'experience' stocks, their aggregated consensus portfolio (likely mimicking the household-equal-weighted portfolio) primarily tilted toward stocks with high past share volume and dollar-trading volume. These were mostly big stocks. Both their timing and their consensus portfolio performed well from mid-2018 to mid-2020."

As rates top 7%, remember that the last decade was a gift of sub-5% mortgages and the 30-year rate peaked at double digits during the 1980s.

Although Robinhood investors have tended to buy "riskier" stocks, MarketWatch columnist Mark Hulbert noted: "Welch's findings are an illustration that, while not every investor is rational, the collective wisdom of the crowd is often superior. Keep that in mind the next time you hear a Wall Street guru insist that small investors who frequent platforms such as Robinhood (HOOD) don't know what they're talking about. There's a distinct possibility that, as a group, those small investors are doing better than the guru." Food for thought for young, retail investors.

Take out a 529 tax-advantaged savings account for your child's education. If you want to expand your family, you can even do this before your next child is born. As rates top 7%, remember that the last decade was a gift of sub-5% mortgages and the 30-year rate peaked at double digits during the 1980s. If I could give one piece of advice to my younger self, it would be to focus on the long race, not the short twists and turns, bumps and potholes. There will be deaths, there will be taxes and, yes, there will be another recession at some point in the future.

Make decisions based on cold, hard facts, not emotion - don't buy the house with the obvious flaw because you fell in love with the floors or paneled walls (you don't know what's behind them); don't buy that stock because it's your favorite brand; and don't sell that stock because you're panicking. Fear, ego and frivolity are not reasons to make financial decisions. You want to find yourself in a place where you have the ability, in retirement, to work if you want to work, and live where you want to live.

Our search for financial freedom is not unlike our search for home.

April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of "Financial Fitness" articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.

The Moneyist regrets he cannot reply to questions individually.

Previous columns by Quentin Fottrell:

I have $1.5 million in stocks and bonds. I asked my broker to convert my bonds to cash. He didn't and my portfolio fell by $100,000. Can I sue?

'Don't judge me': I'm 54, married with 5 kids. I have $20,000 in debt and $20,000 in mutual funds. I inherited $10,000. How do I invest it?

My elderly parents are hoarders. I see them once a year. They say cleaning up their 'junk' will be my problem after they die. What can I do?

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