By Scott Burns

Q. A recent piece by MarketWatch columnist Brett Arends,“The Stock Markets Big Lie Revealed”, indicated that private equity funds provided their well-heeled investors with higher returns than regular investors can achieve in the public stock market. Does this have any direct impact on regular investors? My husband and I are 59. He expects to continue working for another 5 or 6 years. —J.K., by email

A. Mr. Arends appears to have taken the figures offered by his source at face value. That's generally not a good idea. Here are some questions that would have to be answered to have a context for the figures:

1. Have the returns have been adjusted for survivor bias, the fact that failing private equity funds, just like failing mutual funds, simply disappear from the record? As a consequence, the record favors the better performing private equity funds and shows a higher return than most actual investors would have experienced.
2. Have the returns also been adjusted for loss of liquidity? Your money in a private equity deal is tied up, usually for periods that are multiples of years.
3. Have the returns been adjusted for increased risk due to heavy use of debt leverage by private equity firms? If a company has no debt and earns 10 percent on equity, a private equity buyer can borrow heavily. That can increase the return on equity dramatically. The risk of going broke, of course, will also increase. It was debt leverage and risk at major financial firms that precipitated the financial crisis for which we are all still paying.

Bottom line: There is no nifty little private market where big money investors get special big returns. This is just another market where risk takers assume more risk. Sometimes they increase their return. Sometimes they lose their money.

Q. I am 60 years old. I have been retired for 6 years. I currently have about $700,000
invested in a "coffee house portfolio" with Vanguard. I have read a couple of books on the Infinite banking concept, including the R. Nelson Nash book, “Becoming Your Own Banker”, in which life insurance is used to provide lifetime income sources. An illustration for a whole life policy, for instance, indicates that I can pay in my $700,000 over a period of 8 years and start withdrawing $63,000 per year for 20 years.

While the "conventional" wisdom has been to hold the money in a diversified portfolio, the actual performance of my portfolio over the past 5 years has been an average of about 4.1 percent per year. So with the volatility of the past 5 to 10 years I may well run out of money sometime in my mid to late 80's if I start withdrawing $63,000 a year.

It appears that the whole life policy will provide a "guaranteed" 20-year "defined benefit pension." It will also provide a small "death benefit" for my kids. And unlike an annuity, it would also provide flexibility for any "unforeseen events.” What am I not seeing? —G. D., by email

A. A lot of things with life insurance aren't so attractive when you put the gee-whiz numbers in a calculator and figure out the present value of wonderful sums in future cash.

That $63,000 for 20 years is actually worth only $856,190 at the start of taking the income 8 years from now if you assume a discount rate of 4 percent— very close to our current inflation rate. And your current $700,000 will grow to $856,190 if you can earn about 2.5 percent over the next 8 years. So the insurance company isn't taking much of a risk to provide the promised income. You should also consider that your payout promises, due over the next 28 years, are not inflation protected.

You'd have more flexibility and more inflation protection if you continued with your more diversified alternative, while buying life annuities each year as you age from 60 to 70, allotting some specific portion of the portfolio to life annuities. You could either buy immediate annuities and reinvest the income or you could buy accumulation annuities with the intention of converting to life annuities at age 70.

The bottom line here is that there are ways to create income without betting the ranch on a single product.