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Investor's Insight - January 2, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
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EIGHT PERCENT, YOU MUST BE DREAMING
by Scott Burns
Q: I'm 63, and my wife is 60. We are both retired. Our
retirement and Social Security total about $5,000 per
month, gross. Our house is paid for. We have $220,000
in money markets drawing 5 percent, which are insured
by the FDIC. We would like to earn about 8 percent on
our savings. Any recommendations? -- H.H., by e-mail
A: Sorry, no recommendations. And if someone tells you
he has an investment that will provide you with a safe
8 percent return, grab your wallet and run.
While all of us would love to find some hidden, safe
little gem of an investment, the brute reality is that
millions of people are scouring the world for invest-
ment opportunities, safe and risky, every minute of
every day (and night). The result is a market that
has no undiscovered havens.
Today, a safe investment pays about 5 percent. Any-
thing that is higher generally involves some degree
of risk -- liquidity loss or actual risk of loss of
money. That's the way it is.
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Q: I am 54 years old and divorced, earning about
$80,000 per year. I have $175,000 in my retirement
fund, to which I contribute 5 percent of my salary.
My company matches 2.5 percent. I am invested entirely
in stock: Legg Mason Value trust fund, T. Rowe Price
Mid-Cap Growth, Mass. Investors Growth stock fund and
MFS International Equity fund. My home is worth
$550,000, with a mortgage balance of $180,000, and I
plan to downsize in another two years or so. I have
no other debt.
Am I doing OK? At what point should I switch my in-
vestments to something less risky? Any advice you
could give me would be much appreciated. Thank you!
-- C.M., Boston
A: You're doing OK, with caveats. You're in much better
shape than the average worker, you have some amount of
diversification in your investments, and you're planning
to mobilize some of your home equity in the future.
You'll also be due for a fairly hefty Social Security
benefit. That's all good news.
Your current and future contributions would grow to
about $147,000 over the next 13 years if you earned 9
percent. Over the same period, your existing balance
of $175,000 could grow to $536,000 if it grew at the
same 9 percent rate. That would give you retirement
savings of nearly $700,000 -- more than eight years
of your current income. Add some of your $370,000 in
home equity to the mix (while reducing your shelter
expenses when you downsize), and you could retire in
very good shape.
I'd feel more comfortable if you put some fixed-income
in your portfolio because you're in your 50s, the Nasty
Decade, the one where things happen that really make a
mess of well-crafted plans. So have some cash around.
Put some fixed-income in your qualified plans.
And the faster you downsize, the better. Right now
you've got nearly 70 percent of your net worth tied
up in the real estate market. It's been very kind to
you in recent years, but it may not be so kind in the
future.
Finally, flexibility is your biggest asset. The money
you have will go a lot further for you if you think
about moving to a lower-cost area when you retire.
Living expenses will be lower, and you're likely to be
able to buy a lot more house (or condo) in places such
as Arizona, Texas and New Mexico.
Q: As a 56-year-old with 33 years of employment with
DART, a defined-benefit plan, my 401(k) ($200,000),
my wife's 401(k) ($330,000), additional savings of about
$200,000 and no debt, I know we are better off than most.
When I retire at age 60, I have two options for survivor
benefits from my defined-benefit plan, 50 percent or 100
percent. The difference between the two options is a $350
monthly reduction in my starting pension. Since my wife
is 47, I plan to select 100 percent. Is this a good choice?
-- P.H., Mesquite, Texas
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A: Yes it is. With you retiring at age 60 and with a nine-
year age difference, your pension benefit will have much
less purchasing power when the issue of survivor benefit
comes around in 25 years or so. The 50 percent survivor
benefit would be a slight cut in living standard on its
own, since one person can't live for half the price of
two.
Meanwhile, your $700,000 in retirement accounts should
produce an inflation-adjusted long-term income of about
$28,000 a year to add to your pension benefit.
You can discuss this issue or any other topic in the new
Investor's Insight forum. Check it out here...
Investor's Insight Forum
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
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END OF INVESTOR'S INSIGHT
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