Q. My wife and I are in our early 50's. We are retired from the military with a monthly income of about $1,500. We are self-employed and work together out of our home. The home is paid for and has been appraised at $150,000. We have no savings or investments as it has taken all we have to get the business off the ground.

It is successful and we anticipate an income of $120,000 to $150,000 this year. We incorporated and the corporation takes care of most all payments for vehicle, automobile, and term life insurance, etc. We have an accountant who is a great help but short of advice for investment.

We have access to investing in USAA funds and have good reports from friends. We would like to work for 10 more years and then retire completely. We want to invest about $30,000 this year, leaving some for business development, and then increase investments annually. I know it's a little late in life, but where do we start?

---L.M., San Antonio, TX

  

A. Thank you serving. Yes, you're "late." But you are well positioned to create significant security for yourself in the next ten years. This is particularly true if your business can be sold when you retire.

Your first step is to visit your accountant to make certain that you are maximizing possible contributions to qualified plans.

After that you need to work out your relationship with USAA. Here's the good news. This is a true service organization. USAA makes great efforts to offer very competitively priced products to its constituency.

The average domestic equity fund in the Morningstar database has an annual expense ratio of 1.42 percent, excluding any up front commissions. USAA averages 0.99 percent with no upfront commissions. Similarly, USAA's 5 taxable bond funds expense ratios average 0.52 percent, half the average expense ratio of the average taxable bond fund.

In addition, USAA has done a good job on the fixed income side of their fund business, fielding a number of funds with top ratings. Their taxable bond funds have better than average performance. Ditto their tax-free bond funds.

Unfortunately, the equity side isn't such a good story. Their equity mutual funds, on average, trail the average domestic stock fund and the average international fund.

With that caveat, it is still possible to assemble a nice portfolio entirely within the USAA fund family. If you follow the Couch Potato Portfolio, for instance, you could combine their S&P 500 Index fund with their Short Term Corporate Bond fund. For one stop shopping you might consider their Balanced Strategy fund, a mixture of stocks and bonds that has scored in the top 20 percent or higher over the last year, 3 years, and 5 years.

  

Q. In some columns you have advocated the privatization of Social Security. Would you please explain why privatizing Social Security with all its uncertainties (when withdrawal time comes) is better than the government investing the funds into a broad index fund such as the Wilshire 5000 or a similar index? I assume that legislation would have to be passed which would forbid Congress from tampering with the investments or playing favorites.

---K.S., San Antonio, TX

  

A. The problem with Social Security is that funding its liabilities like a traditional pension fund would essentially require government ownership of the entire private economy. Estimates of Social Security unfunded liabilities have been equal to the net worth of the American public since I first started writing about the subject in 1975. It's just too big a number to be handled as a traditional pension fund unless it is done as individual accounts with private ownership.

You're justified in worrying about the uncertainties of the stock and bond markets--- but the alternative is the uncertainties of population and work force growth. Social Security is in trouble because the ratio of workers to retirees is declining as life expectancies expand. As a result, the tax burden for supporting retirees is spread over fewer workers.

It's important to remember that this is what some call a "Cadillac Problem"--- the result of social and economic success. It could be solved overnight simply by adopting the environmental conditions and living standards of the former Soviet Union where life expectancy is under 60 years.