Q. Can you tell me what approximate return per year one can expect on each $1000 invested in a good stock fund? I have in mind to hold the investment until I need the money and then sell.

---H.E., Dundee, IL

  

A. Expecting clockwork-like returns on equity mutual fund holdings is a good way to be a disappointed investor. According to Ibbottson Associates, the long term average return on stocks is 10 percent… with a standard deviation of plus or minus 20 percent.

What does that mean in English? In 2 years out of 3 you can expect the return on your stocks to be somewhere between minus 10 percent to plus 30 percent. In the other year it will be higher or lower than that. Just look at Growth and Income funds in the last three calendar years: 1993 plus 11.2 percent; 1994, minus 1 percent; 1995, plus 31.78 percent.

Unless you expect to hold for 5 or 10 years, buying with the intention of selling is not a good idea.

  

Q. I am trying to decide how to pay for 8 more years of college for my two remaining children. One is a freshman this fall and the other will enter college in 1997. I am a single parent and when my husband passed away I felt pretty comfortable from a financial standpoint.

My financial advisor has suggested looking into a home equity loan for the majority of the cost and to pay it off on a 15 year note. I know it would help from a tax standpoint. What do you think? I have $560,000 in an account with my advisor at American Express.

---J.L., Owantowna, MN

  

A. Are you sure there will be tax benefits? As a head of household you have a standard deduction of $5,900 for 1996. As a result, you will only have tax savings when your deductions for real estate taxes and mortgage interest exceed that amount.

If your current tax deductions equal or exceed $5,900 you'll be borrowing money at 9 percent or more, tax deductible, to be paid by taxable investment earnings that will probably be lower. You can't get a riskless 8 or 9 percent return in bonds. You may not get an 8 or 9 percent return, over the next 5 years, in stocks. It really doesn't make a lot of sense.

If your current tax deductions are less than $5,900 it makes even less sense.

My suggestion: put together a withdrawal schedule for the next 5 years, keep your money earning as long as possible, and liquidate investments to meet the need semester by semester. If the total bill is more than you feel comfortable about, talk to your kids about how much they need to earn during the summer and school year.

  

Q. I am 44 years old with $200,000 in my 401k I am contributing 15 percent of my $60,000 income with an additional 5 percent company contribution. I plan on maintaining this level of contribution until age 55 at which time I plan on letting the fund grow on its own as I pursue some semi-retirement plans.

I will stay fully invested in equity mutual funds until age 55 at which time I plan on switching to a more balanced portfolio with growth expectations of 8 percent until I reach age 62.

My question is this: will I have to worry about excess distribution taxes if I wait until age 62 to begin withdrawals? If so, I am thinking I may be better off redirecting some or all of my current 401k contribution to a taxable investment.

---V.H., Phoenix, AZ

  

A. Excess distribution taxes are incurred if your annual distribution from a plan exceeds $150,000, a sum that is currently indexed to inflation. In addition, you are not required to take distributions from your qualified plans until age 70  ½. At that point, you must choose a distribution plan based on your life expectancy or your joint life expectancy with your spouse. That means you could have a required withdrawal rate of about 9 percent ( for a single male) down to about 5 percent for a joint expectancy.

To have a required withdrawal over $150,000 you would need to have $1,650,000 in your account as a single male or about $3 million as a married couple.

Now let's look at what your situation might be. If your salary grows with inflation and you get an average return of 10 percent until you are age 62, you will accumulate nearly $1.9 million when you start making withdrawals to meet retirement expenses. While the account may continue growing, odds are against it becoming large enough to put you up against the excess tax.