November 3, 1997

Q. I am 33 years old and am considering paying off the remaining $6,000 balance on my car loan. This represents the final two years of a five-year loan at 7 percent. At the same time, I feel ``behind'' on my retirement savings, since I only started participating in my company's 410(k) plan three years ago, and have built a balance of only $14,000, which is invested in the Galaxy Equity Value fund. Should I pay off the car loan, or invest the money in a mutual fund? I have read some good things about funds such as the Vanguard Index 500. Should I invest in this to catch up on my late start entering the 401(k)?

C.K., South Weymouth

A. If you're worried about your ``late'' start on retirement savings, consider this: If you invest $6,000 right now and achieve 10 percent average annual returns, by age 65 the investment would be worth $126,682. That strikes me as a pretty tidy pool to swap for two years of auto loan payments, so I wouldn't hesitate to choose the fund.

There have indeed been some nice things said about the Vanguard Index 500 fund, but those reviews are based largely on its recent performance. With a five-year record of 20.62 percent average annual gains, and a three-year record of 29.79 percent average gains, this is a horse that ought to be pretty tired.

Since your ongoing contributions to your 401(k) program will soon make that account dwarf the proposed taxable account, why not use the taxable account to venture into some riskier, but potentially more rewarding, investments? For example, Vanguard Specialized Health Care fund.

The fund has a five-year record of 23.91 percent average annual gains, and has scored gains of 31.13 percent over three years. Even though these numbers exceed those of Index 500, I think the long-term prospects of this sector are excellent.

I'm pretty bearish on the current market, and suggest you begin only with the $3,000 minimum investment for taxable accounts, putting the remaining $3,000 in the Vanguard Prime Money Market fund, with instructions to transfer $130 a month into Health Care.