Q. I just received my new credit card statement.  The interest rate is now 32 percent! I am thinking of just telling them to shove it. Interest rates like this are clearly going to force many people into bad credit ratings, bankruptcy, or foreclosure. With the economy looking so weak, surely it would be better to not pay this account.

Like many Americans, I can't save. Without caps on interest rates, I may never be able to save. This is loan-sharking.  I read a lot of excuses, but I see no action to really help people. What should I do? What should others in my situation do?  ---W.P., by email

A. That’s a very high interest rate. While I have no love for the credit card companies, the real test here is how you respond. There are many credit card offers out there. Typical interest rates are much lower. According to www.bankrate.com, for instance, the average interest rate on all variable-rate cards is about 11 percent.

You should move your account to a lower-rate credit card.

If you can’t, there is probably a reason, such as spending more money than you earn. If you can’t change to a card with a lower interest rate, I have a simple suggestion:

Don’t get angry-- break even!

Stop using the card.

Start making more than the minimum payment.

Go on a cash budget.

It won’t be easy, but it’s the fastest way to stop feeling like a victim and start feeling in control of your life. There is a lot of support for doing this. First you could start reading columnist Liz Pulliam Weston or listening to radio show host Dave Ramsey. Both have written books on debt and credit management. Dave is strongest in helping you get out of debt. Liz is best in helping you manage your credit once you have some degree of control. If you want to get started now, just Google their names.

Once you get your spending under control, you can reduce the amount of interest you pay in two simple steps. The first is getting a card with a lower rate. The second is to work the debt down to zero. I’m serious.  As you do that, you’ll enjoy a nice increase in purchasing power. A lender won’t be skimming spending power off the top--- your top.

Q. Why didn't the GNMA funds get hammered in the mortgage meltdown?  I sold Vanguard GNMA shares a couple of years ago, expecting the price to fall, yet the current price is up slightly. ----G.S., by email   

A. The big lever on mortgage-backed securities funds--- such as Vanguard GNMA--- is whether mortgage rates are rising or falling. When rates are rising, fewer people refinance and the average maturity of the bonds rises. When rates are falling, more people refinance and the average maturity of the bonds falls. More important, the fact that people have the option to refinance, or not, limits the potential appreciation of mortgage securities.

The result is a higher current yield than typical debt instruments. That’s good for most investors.

Because GNMA bonds are government-guaranteed, neither credit quality nor default losses are an issue. Had you invested in other kinds of mortgage-backed securities, selling when you did would have shown great foresight because defaults have risen and the securities are selling at much lower prices.

If you check the performance of the Vanguard GNMA fund on the Morningstar website, you’ll find that it is a five-star-rated fund that has performed in the top few percentile of all intermediate government funds over long investment periods. It has done this for as long as I can remember. The fund has had only a few years of low returns, such as 1998 and 1993, when the fund was in the third and fourth quartiles of performance, respectively.

By now, having watched your house fall in value, your 401(k) plan slide toward nothingness, your job security disappear, your benefits fade, the complete failure of business management, the disastrous failure of regulatory control, the finger-pointing of the political parties, the shameful desire of a state governor to sell a Senate seat and the revelation of an epic $50 billion fraud, none of us could be blamed if we wanted to move to Montana and shun the company of human beings.

Having written a newspaper column for more than 30 years, I thought I was pretty tough-minded. But today, watching our dysfunctional institutions, I feel something like the shock and horror a parent must feel when he discovers that a beloved son or daughter is actually a serial killer. I don’t understand the recklessness, the greed, the dishonesty. I don’t fathom the unrelenting self-aggrandizement of the politicians, the executives, the lenders big and small, or the investment bankers. I’m quite sure you don’t, either.

So here’s the big question.

What can we do to feel safe again?

Should we push the politicians for fundamental reform?

No way. They simply aren’t qualified to provide it. Neither party has shown any willingness to stop promising benefits that have to be paid for by our children and grandchildren. Their Ponzi scheme, more politely known as Social Security and Medicare, is far larger than the alleged fraud of Bernard Madoff.

The tough answer is that we have to change. The moment we ask the politicians, regardless of party, we’re disempowering ourselves and empowering them.

That is the opposite of what we need to do.

We need to make the politicians and business leaders get concerned about what they can do to regain our trust, our vote, and our business. We need to operate from a position of strength and self-reliance, not weakness. We need to become the kind of citizens that Thomas Jefferson thought we were.

It won’t be easy, but here are some of the basic steps. Think of them as resolutions for 2009 and later.

Go Cash. We can’t pressure the politicians if we’re as debt-strapped as they’ve made the country. We need to do whatever it takes to eliminate the menace of credit card debt. We should make it a goal to pay all of our bills in full monthly and build enough equity in our homes that we can self-finance most outsized expenses. That means the end of a debt-driven consumer society.

Our belt-tightening (read: lower standard of living) may last as long as five years.

The lending industry won’t like this. We may owe them money, but we don’t owe them any consideration. The bankers--- investment and lending--- should consider themselves fortunate not to be tarred, feathered and run out of town.

Be Prepared. It’s not just a Boy Scout motto. Most of us suffer from a misplaced trust that the world is a place of civility and continuity. It isn’t. We need to keep a cash reserve large enough that we don’t worry at every economic hiccup. As a practical matter, even if your cash reserve earns zero interest, it can produce an outsized return in smart, day-to-day purchases of used and bankruptcy sale goods.

Train yourself in Self-Reliance. Most Americans would be endangered if they lost their income for a month, their electricity for a week, or their access to a supermarket or gas station for a few days. We rediscover this in every major snowstorm or hurricane. We simply don’t think about being able to sustain ourselves in our homes in the event of utility failures or worse.

It’s time we did.

If you don’t know where to start, let me suggest “Just in Case: How to Be Self-Sufficient When the Unexpected Happens” (Storey Publishing, $17). Written by Kathy Harrison, the book covers the basics of emergency preparedness for staying at home, or having to leave home quickly, in an easy 230 pages. Another book, Jack A. Spigarelli’s “Crisis Preparedness Handbook: A Comprehensive Guide to Home Storage and Physical Survival” (Cross-Current Publishing, $20), goes further. It includes a brief section on firearms and ammunition. Both are available on Amazon.com.

Next week: Fearless Forecasts, 2009

Q: I notice that you seem to tout mutual funds regularly. But I have never seen you mention private ownership of individual stocks. I wonder if there is a reason. Our retirement is extremely comfortable because my father built a retirement fund -- a small fortune -- by buying individual stocks. They not only supported him and my mother, now they also support my husband and me (in addition to Social Security and my teacher retirement).

My folks lost their house in the Depression, and my dad decided that would never happen to them again. He began studying the stock market and, when he was able, he bought individual stocks for long-term investment. He said he only bought aces, straights and flushes. And he certainly did, because even in these times of upheaval, the stocks I inherited from him hardly fluctuate at all. That is why I wonder why you seem never to recommend his purchasing style. -- J.P., Kerrville, Texas

A: Your father was interested in investing. He also appears to have had very good judgment. That's a rare combination. Most people aren't very interested in investing. Many who are interested don't make good decisions. For these people -- the vast majority -- investing in mutual funds is a good alternative to individual stocks because owning a broad portfolio of stocks reduces risk. It can be done at very low expense, using index mutual funds or exchange-traded funds.

Q: How do you receive Social Security without being located? -- J.M., by e-mail

A: You can arrange for your benefits check to be automatically deposited into a checking account at a major bank that offers a large network of ATMs. This will give you access to cash virtually anywhere in the U.S. and in many places outside of the country.

As a consequence, you can move around at will, as many full-time RVers do -- and you'll never need to worry about checks being stolen from your mailbox.

You can learn how to get direct deposit by visiting the Social Security Web site, www.ssa.gov. You can have your other mail from Social Security sent to a mail box service and arrange for it to be forwarded at regular intervals.

If you are living on your Social Security or Supplemental Security Income (SSI) benefits alone, as many retirees and people on disability are, I want to offer a word of advice.

Be cautious about signing up for anything resembling a line of credit with the bank that accepts your benefits deposits. These credit lines have very high interest rates. You can quickly find that spending more than your monthly benefits will put you in a deep hole, much like servicing credit card debt.

Q: Thank you for your recent "dump your money manager" column. It was revealing. Where does the average guy, who uses a management firm of some sort (which usually lists its own fund performance comparisons and indexes, which of course he usually beats), get a list of index funds and their periodic performances to be used for comparisons? It would be nice to sit across from my adviser and have my own list of indexes to compare with his. -- P.L., Nashville, Tenn.

A: There are many ways to do this. One is to visit my Web site, http://assetbuilder.com, and check the performance figures for the Couch Potato Building Block portfolios. These are posted monthly and provide returns over a variety of time periods. You can also check the performance of the Vanguard Balanced Index fund (ticker: VBALX) on the Morningstar Web site.

Soon you will be able to judge the performance of your managed portfolio against a family of diversified index portfolios from iShares, which were launched only recently. These funds have expense ratios that range from only 0.31 percent to 0.34 percent. The funds have risk levels labeled conservative, moderate, growth and aggressive. You can learn more about them by visiting www.iShares.com.

Media accounts immediately labeled the disappearance of $50 billion, masterminded by Bernard Madoff, as "the largest fraud in history." It is a greater wealth loss than having a household name company -- such as Walt Disney, Anheuser-Busch or Boeing -- vanish without a trace.

The loss is mind-boggling. But the figure does nothing to convey the damage this man has done.

One way to measure the extent of the damage is to compare the $50 billion to measures of loss in the FBI's Uniform Crime Reports. In 2007 there were 9.8 million crimes against property in the United States. This included about 2.2 million burglaries, 6.6 million larceny-thefts and 1.1 million car thefts.

I think you'll agree that 9.8 million crimes represent a veritable army of miscreants. In spite of that, our total losses to property crimes in 2007 were a mere $17.6 billion. To be sure, it didn't feel "mere" if you suffered a burglary. The average loss was $1,991. Nor was it "mere" if you were one of the 6.6 million people who suffered a larceny-theft. In those, the average loss was $886.

But when you add all the losses in 9.8 million common property crimes, it's just a fraction of the estimated $50 billion loss attributed to Bernard Madoff.

Perhaps 2007 was an "off" year for theft?

Well, there was a slight decline in the number of crimes, but not in the amount lost. In 2006 the report shows nearly 10 million crimes against property and losses of another $17.6 billion. Similarly, the 2005 report shows nearly 10.2 million crimes against property and a total loss of $16.5 billion.

Add the three years and you get $51.7 billion. Using that value, Bernard Madoff has caused losses equal to all the losses caused by all the conventional thieves in America for nearly three full years.

We get a different perspective by reading the annual report of the Securities and Exchange Commission. That's the federal agency charged with protecting investors. In the listing of "enforcement milestones," the 2008 report proudly notes that it had "obtained orders in SEC judicial and administrative proceedings requiring securities violators to disgorge illegal profits of approximately $774 million and to pay penalties of approximately $256 million."

In other words, the total recovery of the entire agency, in a full year, was about 2 percent of what Bernard Madoff -- the guy they didn't notice -- made disappear.

This leaves us with two really big questions.

First: What can be done to keep America from becoming a Coffee Can Economy?

I'm serious. Right now all we know is that nothing is trustworthy. Not our political leaders. Not our business leaders. Not the government or private institutions that are supposed to provide oversight and evaluation.

Can anyone, from any of these institutions, give us any reason not to keep what savings we have buried in a coffee can rather than entrusted to the institutions that have destroyed the most fundamental element of commerce -- trust?

The answer is a flat "No."

Second: In the matter of Bernard Madoff, how can the punishment possibly be fit to the crime?

To me, this begs for a punishment that is both cruel and unusual.

Does life without parole in a gentleman's federal prison cut it? I don't think so. Does life without parole in a facility devoted to violent petty criminals sound better? Yes, but the improvement is slight.

In medieval times a man who committed murder or treason could be declared an outlaw. This literally meant he was outside the law, no longer protected by the laws of his society. His property was forfeit. No one was allowed to provide him with food, shelter or aid. And anyone who found him could kill him.

When you look at the damage done, this wouldn't be a cruel or unusual punishment. It fits the crime. It's what we need for white collar financial criminals.

If you think I'm in a rage about this, you're right.

But I bet you are too.

On The Web

Q. Does Fidelity have a fund that compares to the Vanguard Balanced Index (ticker: VBINX)? I like the performance and the low expense fees the Vanguard fund has. I also like the ratio of 60 percent stocks, 40 percent bonds. I currently have things set up with Fidelity and would like to stay with them, if possible. ---E. S., by email from Austin, TX

A. There are three ways to get that fund--- or a reasonable facsimile--- and stay at Fidelity. One is to open a Fidelity brokerage account and buy Vanguard Balanced Index fund through the brokerage account. It will involve paying a commission, but you’ll still have an account at Fidelity.

The second option is to create a virtually identical balanced index fund using two of the few index funds that Fidelity offers. You can do this by investing 60 percent of your money in Fidelity Spartan Total Market Index fund (ticker: FSTMX) and 40 percent of your money in Fidelity U.S. Bond Market Index fund (ticker: FBIDX). The expense ratios on these funds are 0.10 percent and 0.33 percent, respectively. And each requires a minimum investment of $10,000.

That means your minimum portfolio size would be $25,000--- $15,000 in Total Market and $10,000 in U.S. Bond Market. If you did this, the average expense ratio for the portfolio would be 0.19 percent, exactly the same as the expense ratio for Vanguard Balanced Index fund.

If $25,000 is more than you can invest, you have a third option.

You can build the fund using Vanguard exchange traded funds and buy them through a Fidelity brokerage account. You would invest 60 percent of your money in the Vanguard Total Stock Market ETF (ticker, VTI) and 40 percent in the Vanguard Total Bond Market ETF (ticker, BND). These ETFs have expense ratios of 0.07 and 0.11 percent, respectively, so the average cost for your portfolio would be lower than the Vanguard fund, about 0.086 percent. Assuming a commission cost of $12, your expenses will be lower using this path if your portfolio is $23,000 or more.

Q. My financial adviser proposes a 2, 3, 4, 5, 6 year ladder of annuities from the attached sheet to achieve an average 5 percent return annually. I want no risk in my investments. I am 78 years old and retired. In the event of my death, the annuity pays my heirs as it would if I were alive. Your comments, please, about using this vehicle. ---G.E., by email

A. I think that’s a good suggestion. Your financial adviser is using data collected and compiled by Danny Fisher in Dallas. You can see some of his data on his website, www.mrannuity.com. Mr. Fisher has kept a database on fixed income annuity products for more than two decades. He regularly produces statistics on the range of interest rates available from insurance companies.

Quite often the “spread”--- the yield difference between an insurance company-based, CD-like annuity and a comparable yield Treasury note--- has been very small. But in the current angst-driven market, carefully selected CD-like annuity contracts offer a major yield advantage.

For instance, while your advisor will have little difficulty putting together a ladder of CD-like annuities with an average yield of 5 percent, a quick trip to www.bloomberg.com will tell you that a 2-year Treasury was recently yielding only 0.75 percent, while a 5-year Treasury was yielding only 1.49 percent. For retirees, that’s like the difference between opening a can of Chef Boyardee at home and dinner out. Basically, your interest income will triple.

Please note, however, that this is NOT “no risk.”

The only “no-risk” investment you can make is with our irresponsible and fundamentally bankrupt government because it has a license to print money when tax collections lag. There is some amount of risk to ANY other investment. That means your adviser can earn his keep by paying attention to the financial strength of the insurance company offering the annuity contracts.

One of the best lessons I’ve learned was not in a classroom. It was from a crusty machinist in Rochester, New York. I haven’t seen him in 25 years, but the lesson has stayed with me. It seems particularly important now.

His name was Jerry Pfrengle, so I call it the Pfrengle Principle. It’s all about the income. To have value, you need income. Never forget that income precedes value.

Here’s the story. In the early ‘80s I was on the board of directors of a small, multidivisional manufacturing company with about $50 million in annual revenue. I was also chairman of the audit committee. The company manufactured and supplied rubber, plastic and metal parts to companies like Xerox, Kodak, IBM and Ford. One division made spark plug boots for Ford. Another made major castings for Xerox copiers and IBM keyboards. Jerry’s division made machined parts for everything from cameras to snow blowers.

Mr. Pfrengle was a machinist who started with a handful of machines. He grew it into a much larger shop. He could do just about anything with metal. Jerry wore a long shop coat, but even when he took it off, the deep scent of machine oil preceded him like a strong aftershave lotion.

Jerry was also a collector. Only he did not collect old cars, vintage watches, revered wines, or ancient lithographs. He collected automatic screw machines and other metal-working equipment. Behind his shop, a large Quonset hut was stuffed with his machinery, all bought at scrap metal prices.

When he got a piece of equipment--- often at a going-out-of-business sale or auction--- he took it to his Quonset hut and refurbished it at his leisure, the way other men restore old boats and antique cars. Then it just sat there.

Jerry would wait for a turn in the market. When it came, he either put the machine to work in his own shop, or sold it at a large profit.

“The big companies give them away when the economy is off,” he told me. “And small companies pay a premium for them when they have orders in hand.”

Value was all about the income you can produce with an added machine, he explained. Without orders, the machines were only worth their scrap value--- and even that would be low when everyone else was scrapping, too. But with orders, a single busy machine could provide a living for a machinist, pay the rent, and put money in Jerry’s pocket. Or it could be sold at a fat premium.

“The swings in value are always extreme,” Jerry told me. “They’re much more dramatic than the swings in income.”

As consumers, we seldom see this reality so clearly. Whatever the market value of our home, it still provides shelter. The same applies to our cars, appliances and other goodies--- if they are being used, they have a value. We just don’t know what it is in dollars and cents. Similarly, we’re inclined to believe the old Mustang convertible or the aging Persian rug has value because someone, somewhere, will want to add it to his collection. Call it the Greater Collector Theory. Basically, it’s difficult to get a visceral understanding of modest changes in income and extreme changes in value.

Trust me, this does not apply to automatic screw machine equipment.  

If it can’t be put to use producing income, you might have to pay someone to haul it away. You could learn that by spending only five minutes in Jerry’s Quonset hut.

So what does the Pfrengle Principle have to do with you and me today?

Lots.

Right now we’re all transfixed by the disappearance of wealth, vast quantities of it. Much of it is due to empty houses in Florida, Nevada, and California. That is producing a second wave, a major “wealth effect,” as we attempt to save real money now that home appreciation isn’t doing all our saving for us.

So I have a suggestion. Next time you are impressed by a decline in value, check income.  Note that it hasn’t changed nearly as much as value. Note also that income may dip, but it also recovers.

It’s scary out there when you view the world by wealth. So just remember--- it all starts with income. Wealth and value are artifacts created by income.

On the web:

Q. I am 33. I’ve been investing in a 401(k) since I started working, but I'm just now getting serious about the right mix for my investments. I currently have about $70,000. Some is in an IRA rollover. The majority is in my company's 401(k). I have 39.7 percent in small/mid-cap mutual funds, 31.7 percent in large cap mutual funds, 23.8 percent in company stock (the company's match goes here) and 4.6 percent in International mutual funds. I am comfortable with an above average amount of risk.

What is the best way to determine what the percentage breakdown should be? ---K. M., by email

A. There is no short answer to your question. And there is no final calculus that will give you the answer. How you invest depends on your age, job security, and personal tolerance for the ups and downs of the stock market. Your portfolio is 100 percent equities and highly volatile.

Many people who have company stock given as their employer’s contribution compensate for the additional risk by having an offsetting fixed income investment.

If you want to see what other 401(k) plan participants are doing, you’ll find the Hewitt Associates 401(k) index is a very interesting tool. You can find it at www.hewittassociates.com.

They report that in October, 401(k) investors moved out of equities of all kinds, except employer stock. They bought stable value funds and money market funds during the month. With very small commitments to international investments and emerging markets, most portfolio managers would say that Americans were over-invested in U.S. equities and under-invested outside the United States.

Q. Why, if there is such worry about Social Security going broke, is there a limit on the amount of salary that can be taxed? I am not sure what that amount currently is but, I think it is somewhere just under $100,000 a year. It seems like the middle income Americans are, again, supporting our country. ---J. F., by email

A. The employment tax has always had a wage cap. This year it is $102,000, up from $97,500 in 2007. Historically, about 93 percent of all workers earn less than this, the wage base maximum, so it is fair to say that Social Security provides a degree of retirement security for the vast majority of all working Americans.

It could also be said that Social Security assumes that those earning more than the wage base maximum would be capable of saving and taking care of themselves.

What you may not know is that Social Security benefits don’t accrue equally to every dollar of earnings, or every dollar of employment tax paid. This year, for instance, the first $744 of monthly earnings earns a 90 percent credit. Earnings over $744 but less than $4,483 a month are credited at 32 percent. And earnings over $4,483 a month are credited at only 15 percent.

So what a worker receives in benefits is not proportional to his or her contribution. That’s why the Social Security trustees estimate that benefits will replace about 52 percent of a low income workers’ wages and 42 percent of typical workers’ wages--- but only 25 percent of the wages of someone at the top of the wage scale.

If the wage base had no cap--- so that it was like Medicare--- there would be a new question. Would those earning over $102,000 be subject to the tax, but receive no increase in benefits? Or would their benefits be scaled up, even with only a 15 percent crediting rate, to increase their future Social Security benefits?

If the benefit increase path is chosen, the fiscal advantage of extending the employment tax would be significantly offset by the increased benefit obligation.

If the no benefit path was chosen, the change would be a back door way to dramatically increase the income taxes paid by those earning over $102,000 a year. Basically, their marginal income tax rate would increase by 12.4 percentage points. Their total tax rate would rise to at least 40 percent. Some would pay at 50 percent.

That’s a pretty stiff tax rate.

It would, in one step, transform Social Security from a widely accepted and much needed retirement security program into a massive welfare program. It would no longer be a “compact between generations.” Instead, it would be a powerful income redistribution program.

Are you sure you want that?

Your retirement may not be as badly damaged as you think.

Yes, I know that’s hard to believe. Whether you are 50 or 65, losing a third or more of your retirement savings puts a really dark cloud over your future. That’s what we’re being told, day in and day out, by the talking heads on TV.

Well, some historical evidence says they’re wrong.

They’re wrong because they aren’t considering the biggest factor that affects the amount of money you can safely withdraw from your retirement portfolio--- market valuation levels. Retire when market valuation levels, as measured by the price-to-earnings ratio for a stock, are high and you’ll be taking a big risk if you take more than 4 percent a year. Retire when market valuation levels are low, however, and you may be able to withdraw at 6 percent with limited risk.

We can argue about what the exact P/E level of the current market is, but there is no doubt that it is down substantially. And below average. So if you were planning to make withdrawals at a 4 percent rate, you may now be able to make them at a 6 percent rate.

In other words, even though you may have lost one-third of your nest-egg, your retirement spending may suffer very little. Take 4 percent from a $300,000 nest egg and you’ve got $12,000 to spend. Take 6 percent from a $200,000 nest egg and you’ve got… $12,000 to spend.

You can understand how this works by checking the data from a research exercise I did using Morningstar Principia. The exercise is similar to what I did years ago (1995) when Peter Lynch suggested that people could be 100 percent invested in common stocks, withdraw 7 percent annually and never go broke. Using similar software, I showed that Mr. Lynch was wrong--- you had a substantial chance of running out of money at such high withdrawal rates, even though stocks averaged returns of 10 to 11 percent.

This time the test is to compare two 25-year investing periods. The idea is to see how many of a group of fourteen well-known mutual funds survived the period at different withdrawal rates. In both periods the funds were the same, a mixture of 14 load and no-load balanced and domestic large blend equity funds that have very long histories. Here’s the list: Alliance Bernstein Balanced A shares, American Funds American Balanced A shares, American Funds Investment Company of America A shares, Dodge and Cox Balanced, Dreyfus, Eaton Vance Balanced A shares, Fidelity, Fidelity Puritan, George Putnam of Boston A shares, MFS Massachusetts Investors Growth Stock A shares, Pioneer A shares, T. Rowe Price Balanced, Vanguard Wellington, and Vanguard Windsor.

In each time period the funds were set for initial withdrawal rates of 4.2 percent to 9.0 percent. Then the initial dollar withdrawal amount was increased each year by 4 percent to account for inflation. The program calculates the value of each fund at the end of each year. The results are shown below.

Down Is Up: Low Valuations Mean Higher Possible Withdrawal Rates

This table shows the number of funds from a sample of 14 that survive a 25 year retirement period at different withdrawal rates. It also shows that the number of surviving funds changes a great deal depending on whether you start making withdrawals in a period of high, or low, equity valuations.

Start at a period of high valuation--- such as the 25 years beginning in late 1968--- and 3 of the 14 funds don’t even survive a 4.2 percent withdrawal rate for the 25 year period. Raise the withdrawal rate to 6 percent and only one fund survives. All the others run out of money before the 25 years are up. Raise the withdrawal rate to 6.6 percent and not a single fund survives.

Start at a period of low valuation--- such as late 1983--- and retirement improves substantially: all fourteen funds survive 25 years of 6 percent withdrawals. You have to ratchet the withdrawal rate up to 9 percent before you whittle the funds surviving down to a single “last man standing” fund.

That’s quite a difference.

Is this a lead pipe cinch--- just raise your withdrawal rate to compensate for lower asset values? No, it’s not. But the odds are in your favor.

On the web:

Earlier columns about Peter Lynch and dangerous withdrawal rates:

Q: I participate in the federal Thrift Savings Plan. I have my money distributed in these funds: 60 percent in large stocks, 20 percent in small stocks and 20 percent in international stocks. I have lost about $35,000 in the recent decline. I am not thinking of retiring anytime soon (maybe in the next couple of years, depending on how the economy goes). I feel it is too late to move my earnings into one of the fixed-income funds. I have heard all the experts on the economy and, for the most part, they seem to think we should leave it be. But I am really getting concerned. What do you recommend? I am 61 years old. -- V.H., Nashville, Tenn.

A: With every dime of your Thrift Savings Plan invested in equities -- U.S. large stocks in fund C, U.S. small-cap stocks in fund S, and International stocks in fund I -- you've really taken a beating.

But you're right about toughing it out. Now is not the time to sell. Warren Buffett is buying. Jeremy Grantham, a long-term bear, is saying stocks are now more attractively priced than any time since 1987. So is Jeremy Siegel. So hold on and remember that you've still got years left to work before you retire.

There is, however, something you can do to reduce your worry level. You can adjust your new contributions to the TSP to include a fixed-income investment such as the G fund. Your investments would be tax-deductible contributions, and you'd be able to reduce the risk of your portfolio substantially over the next few years as you get closer to retirement.

Q: My husband is 60 years old, and I am 48. We would like to retire. We have both saved money but don't have much more than one year of our combined annual salaries put aside for retirement. If we were to move to, say, Costa Rica or Guatemala, would Social Security mail us our check (assuming we could survive on our savings plus Social Security)? -- R.G., by e-mail

A: You can arrange for direct deposit of Social Security benefits to banks in a number of foreign countries. You can also arrange for direct deposit to a U.S. bank and make withdrawals through correspondent bank ATMs. Most of the people I've spoken with who live overseas do the bulk of their banking in the U.S. and have a smaller, secondary account in the country in which they are living.

(You can learn more about this on the Social Security Web site at www.socialsecurity.gov/pubs/10137.html#direct.)

The biggest issue most expat retirees face is that Medicare benefits are available only in the United States. So if you have a medical problem, you'll be on your own unless you carry one of the more expensive forms of Medigap insurance.

If the stories I am starting to hear are anywhere close to correct, however, not having Medicare coverage may not be as scary as people think. In the last month I've heard two stories of people who have left the United States to receive medical treatment. One didn't have U.S. health insurance but was married to a Mexican citizen. The other went to multiple doctors in the U.S. but couldn't get a diagnosis until she gave up and went to Mexico. Both stories had happy endings.

Q: I have bought closed-end funds in the past and own some, but I wonder what your source is for investigating the discount or premium at which they are selling? I have a Morningstar membership, but I cannot find this information. -- S.H., by e-mail

A: If you have a Morningstar membership, you can go to its "Funds" page. Then scroll down the left side of the page to "Fund Reports." Just below that you can click on "Closed-End Fund Reports" for Morningstar analyst reports on individual closed-end funds. Scroll farther down the page to "Fund Performance" and you can click on "Closed-End Funds" to get data on a wide range of closed-end funds. The first page that comes up will provide a list of funds, the premium or discount at which they are selling, their market return year-to-date and their net asset value return year-to-date.

Also, the web site www.closed-endfunds.com has a very nice screening tool that allows you to pick a fund asset class and drill down to an individual fund to find its current premium or discount to net asset value.

While we are being regaled with unending reports on lost wealth, let's play Pollyanna and examine another aspect -- the unrecognized and offsetting gain in income.

Let's examine what the market crash does to the lifetime income of a couple that retired this year. With a market decline of more than one-third, a few months would appear to make a gigantic difference.

As you will soon see, it doesn't.

The world doesn't end. But it is a bit pinched.

Consider John and Jane Tipman. Both are 65. Between them, they'll receive $1,800 a month in Social Security benefits. They also own their $250,000 house free and clear. And they live in Texas, a state that has no income tax. Thinking about retiring this year, they kept $400,000 of their $600,000 company 401(k) plan in a balanced fund. The remainder was in company stock. Their intention: Invest all $600,000 in secure TIPS, Treasury Inflation-Protected Securities, retire early this year, and do it in an IRA rollover. TIPS were earning 2 percent over inflation.

Just to be safe, we're going to assume they live to be 100, an improbable event. If both die before that age, their estate will be some of their financial assets and their house. If they live to be 100, all they will leave will be their house.

How much would they have to spend each year for the rest of their lives? Using ESPlanner financial planning software, which uses dynamic programming to calculate a level consumption path, I found that they would have $35,498 a year to spend on consumption. They would also have another $6,500 a year to spend on real estate taxes and insurance. And they would have enough money to pay their income taxes and their ever-escalating Medicare premiums. Except for the Medicare premiums, which rise much faster, all their expenses are adjusted for a 3 percent inflation rate. All their spending is in dollars of constant purchasing power.

Now, suppose they had waited a few months. Between the broad market decline and a disastrous decline in their company stock, they lost $200,000.

Talk about bad breaks.

But they still invest the remaining $400,000 in TIPS, now earning 2.8 percent over inflation.

So how much will their loss affect their retirement?

Answer: Not that much. They'll have $30,232 a year for consumption, $6,500 a year for real estate taxes and insurance, plus enough money to pay their income taxes and Medicare premiums. So in spite of losing a full third of their nest egg, nothing has happened to their standard of medical care, nothing has happened to their ability to support their house, and the money they can use for consumption spending has declined by only 15 percent.

Why so little?

One reason is obvious: Much of their income comes from Social Security. It softens the impact of lost savings.

But the impact is reduced for another reason as well. According to Federal Reserve data, while they were losing $200,000, the real return on TIPS was rising from 2 percent to 2.8 percent. That extra return works to offset some (but not all) of the $200,000 loss. If they were retiring at an earlier age, the loss of income would be still smaller.

Why? Because they'd have more years of higher real income ahead of them to offset the original loss of principal. Basically, the larger the increase in real return and the longer you have to receive that increase, the greater the offset for the loss of wealth.

You can see this most clearly by considering two extremes, the very old and the very young.

The very old have suffered an unrecoverable loss of wealth. The value of their assets is down, and they don't have the time for higher income to offset the loss.

The young, however, may enjoy a lifetime increase in consumption. First, they'll be able to buy a house at a lower price and spend less of their income financing the purchase. Second, like the Tipmans, they may enjoy higher earnings on their investments, but they'll have many more years of higher returns. More important, since they're starting with less in savings, the higher real return will offset any losses faster.

Don't get me wrong. I'm not arguing that everything is hunky-dory. But for many, it may not be as grim as it looks.

ON THE WEB

“Should I sell now, before all my money is gone?”

“If I fire my money manager, as you suggest, what do I do next?”

Those two questions dominate my e-mail. I don’t think I need to explain why. So let’s talk this through. First, should you sell now?

I don’t think so. For one thing, most of the damage has been done. We’ve already experienced one of the worst declines in history. It could get worse, but the odds are against it. Jeremy Grantham believes we’re near a bottom, but not quite there. John Bogle makes a good case that stocks could return 10 percent a year over the next 10 years.

That doesn’t mean you can’t change investments. If you hold a domestic stock fund, you can exchange one domestic stock fund for another. Ditto international and emerging markets. My suggestion is that you sell your expensive managed funds and move to an inexpensive index fund in the same category or asset class.

Remember, the money you save will be your own.

Changing funds in the same category has an additional advantage if your money is in a taxable account--- you’ll be able to realize a capital loss. You will probably be left with a loss carryforward. For many, it will last for years. Second, your new fund is likely to have a loss carryforward itself, even if it is an index fund. Since equity mutual funds have been in net redemption (more people were selling shares than buying them), even index fund managers may have been forced to realize losses.

This means you won’t have any net capital gains distributions for quite a while. If the boneheads in Washington have any sense at all, they’ll change current law so that you’ll be able to charge more than $3,000 a year in capital losses against your earned income, providing an immediate tax break. (Just don’t hold your breath--- they didn’t exercise this option in the 2000-2002 bust.)

For most people, leaving a financial adviser is very difficult. You either find another adviser (think: frying pan/fire) or you become your own adviser (worry: more frying pan/fire).

This is why I believe absolutely every investor should start with an “escape road” account. This is an account with a firm that provides low-cost index funds and/or a low-commission brokerage account that will give you access to an entire universe of low-cost exchange-traded index funds. The account can be very small--- as little as $3,000. Or it can be a percentage of your financial assets, say,10 percent.

Once the account is created, you will always have the security of knowing where you can move your money. Better still, the firm that has the account will help you with the moving process. Even better, your new account will have a return that you can compare to the return of your more expensive managed account. (Note: Your escape road account should have about the same mix of equities and fixed income as your managed account. Otherwise, the performance comparison will be apples to oranges.)

So what do you put in your escape road account?

For the smallest accounts that desire extreme simplicity, I suggest Vanguard Balanced Index fund (ticker: VBINX). It’s one-stop shopping and, as I pointed out in a recent column, it has done better than 86 percent, 81 percent, 76 percent and 71 percent of its managed competition over the last 12 months, 3 years, 5 years and 10 years, respectively. Those are pretty good odds. According to Morningstar, the fund has a current yield of 3.82 percent--- enough to meet the income needs of some seniors.

Investors who want greater diversification can build one of my Couch Potato Building Block portfolios, with two to ten funds. My personal favorite is the Six Ways from Sunday portfolio. It has foreign equities, foreign bonds, energy and REITs in addition to domestic stocks and bonds.

Remember, you don’t need an MBA to do this. If you can divide by a number from 2 to 10 with the help of an electronic calculator, you can do this yourself.

Yes, you can!

Remember, this is just money. It is nothing compared to the gift of life.

Have a wonderful Thanksgiving.

On the web:

Sometimes the right thing comes along at the right time. That was my first thought when I read the uncorrected proof copy of “The Only Guide to Alternative Investments You’ll Ever Need” (Bloomberg Press, $26). Written by Larry Swedroe and Jared Kizer, the book takes us on a guided tour of “alternative” investments--- everything beyond day-to-day domestic stocks and bonds.

Read it and you may avoid jumping from the frying pan of the current stock market into the proverbial fire--- to an investment that may involve still more risk and still less return than you’ve experienced in the last year. Swedroe is head of research at Buckingham Asset Management, LLC, an advisory firm that also manages money for other firms. They don’t, however, pick individual stocks or bonds. Instead, they build portfolios from indexes that represent asset classes such as large-capitalization domestic stocks, small-cap international value stocks, and short-term government bonds. Their goal: capture the return of an asset class as efficiently as possible. They don’t try to “beat the market.”

This is important because it defines their framework for evaluating alternative investments. It also helps them make clean, un-hedged calls. They divide the universe of alternative investments into four easily understood categories--- the good, the flawed, the bad, and the ugly.

So what’s good? And what’s ugly?

I can’t go through every alternative investment, but here are a few.

Real estate (generally in the form of REITs) is good. So are inflation-protected securities such as TIPS. And so are international equities, life annuities and stable value funds.

Virtually all the other investments that we hear so much about (and that attract hundreds of billions of dollars every year) are either flawed, bad or downright ugly (see table below).

Sorting Out the World of Alternative Investments<

Real estate, generally in the form of real estate investment trusts, is on the “good” list, because adding it to a portfolio can increase portfolio return without increasing risk. Swedroe and Kizer point out that a portfolio of U.S. stocks provided an annualized return of 12.9 percent from 1978 through 2007, with a standard deviation (a measure of risk) of 15.3 percent. Making that portfolio just 10 percent REITs, however, increased the return to 13.2 percent, while decreasing the risk to 14.4 percent. This is the benefit of broad diversification.

Investing in commodities via the new exchange-traded funds is applauded for the same reason. While the S&P 500 returned 11.41 percent annually from 1991 through 2007, with a standard deviation of 17 percent, adding just 5 percent of a commodity index kept the return about the same, 11.42 percent--- but reduced risk to 15.94 percent.

For Swedroe and Kizer, the test of any investment is whether it will make a portfolio more efficient--- to produce a higher return at lower risk. They search for this because it has a very unstatistical result. The more efficient your portfolio, (1) the better your chance of having more money to spend in retirement and (2) the greater the odds you won’t outlive your money.

Feeling sad that you don’t have enough money to participate in the fancy world of private equity investments? Don’t. Swedroe and Kizer see such investments as flawed. They dramatically increase risk and expenses without providing proportionately increased returns. One study they cite found that before accounting for fees and profit-sharing, the average private equity fund beat the S&P 500 by 3 percent a year. But after those expenses, the average private equity fund trailed the S&P 500 by 3 percent a year. Adjust for lack of liquidity (you can’t just sell your private equity investment when you want; you have to hold it for a long time), and private equity deals are far better for the managers than for the investors.

And don’t shed any tears about not being a “qualified investor” and, therefore, not being allowed to invest in hedge funds. The authors’ well-documented research shows that a typical hedge fund has to beat the market by about 6 percentage points a year, before fees and expenses, just to provide the return of a passive investment in a stock index.

Surprised to see variable annuities are on their “bad” list? Not if you’re a regular reader of this column. They find, as I have, that the expenses of variable annuities exceed the benefits.

Compare the good, flawed, bad and ugly investments, and you’ll find a trend. Good investments are direct, relatively unpackaged, and relatively low in expenses. The worse an investment is, the greater the odds that it is heavily packaged and complex.

Their advice: “Avoid complexity because the complexity is almost certainly designed in favor of the seller.”

On the web:

Q: In your column you frequently recommend taking a lifetime pension and not a lump sum. I could understand not putting the pension lump sum at risk, but it seems to me that taking a fixed pension over, say, a 25-year retirement has some problems. First, since there are no cost-of-living increases, the pension checks will remain fixed and won't keep up with inflation. Second, if something should happen to me and my spouse, the pension does not pay into our estate and benefit our heirs. Third, should the company fail and be unable to meet its pension obligations, we could lose out. So I would favor taking the lump sum and investing it in very safe assets, designed to produce income to us similar to what the monthly pension checks would have been. Am I missing something? -- P.K., Tucson, Ariz.

A: I know it is tempting to take the cash and assume that you will be able to invest it for a higher return and better annual income. But the brute fact is that it is difficult and expensive for the "retail" investor. It would be particularly difficult in the current low interest rate environment.

You also may not understand the benefit that a high and guaranteed income stream provides for the rest of your portfolio.

So let me give you an example. Suppose you have $100,000 in your 401(k) plan. You also have a pension cash offer of $100,000. That pension offer would buy an immediate joint life annuity for you and your spouse. Assuming a 100 percent survivor benefit to your spouse, the monthly income would be $569, according to www.immediateannuities.com. That's $6,828 a year, or a cash flow return of 6.8 percent.

You will not find a safe way, today, to get that much income. Remember, the yield on a 30-year Treasury is currently running at only 4.37 percent, according to www.bloomberg.com. Meanwhile, the high cash return will allow you to draw very little from the $100,000 in your 401(k) portfolio.

If, for instance, you decided to have an overall safe withdrawal rate of 4 percent from your entire portfolio, having half of it in the pension/life annuity would allow you to draw at only 1.2 percent ($1,200 a year) from the 401(k) account.

The greatest danger to retirees is that they suffer a series of losses in their first year of retirement. But a 1.2 percent withdrawal rate is lower than the dividend yield of many funds these days, so you could go for years before you would need to sell shares at a depressed price. Committing to a pension/life annuity works to make it more likely that you won't run out of money. Several studies have confirmed this idea.

Needless to say, you would opt for the lump sum if your company's pension plan was underfunded.

Q: Our youngest child graduated from college this past May. Since then we have been able to save a bit more money. By June 2009 we will have 42 months left on our mortgage of 6.8 percent, and the payoff is projected about $40,000. My question: Should we pay off the mortgage at that time or ride out the remaining few years? -- L.B., by e-mail

A: You didn't say where you lived or what your real estate taxes are. But there is a high probability you will receive no tax benefit from your mortgage interest payments. Why? The standard deduction may be greater than all of your itemized deductions. This year the standard deduction is $10,900 for a couple and $5,450 for a single-person household. The deduction will be higher next year when it is adjusted upward for inflation. Until your itemized deductions exceed the standard deduction, you won't save any taxes on your mortgage interest.

Many couples start running out of itemized deductions right at your life stage -- when the last kid is out of the nest.

So here is your task. Add up your itemized deductions. If the total is less than $10,900, paying off your mortgage is a slam-dunk investment. You'll save the $2,720 in mortgage interest. You'll eliminate the monthly mortgage payment, which will make it easy to increase your 401(k) contributions. And you won't have to pay income taxes on the piddling amount of interest you'll earn on the $40,000.

This is a year for the record books.

As we stand gaping at the incredible losses in the last three months -- or just the month of October -- we search for comparative measures of loss. The period I remember most vividly is 1973-1974. Large common stocks lost 14.7 percent in 1973 and another 26.5 percent in 1974. At the time, it was the worst decline since the Great Depression.

It had tough results.

One of my neighbors on Cape Cod, an antique car collector who had provided the yellow Rolls-Royce used in Robert Redford's filming of "The Great Gatsby," went bankrupt. His summer house was foreclosed. His car collection was auctioned off. He quietly disappeared.

Houses didn't sell. The second-home market died. Everyone wondered just how bad it would get. But 10 years later, large common stocks had provided a return of 6.7 percent, including the years of loss.

What we're experiencing today is worse. As I write this, large common stocks have declined by 39 percent over the last 12 months -- more than the combined decline of 1973-1974.

So, exactly how bad is this decline?

Answer: When you consider 10-year periods of investing, it's right up there with the Great Depression. According to "Stocks, Bonds, Bills and Inflation" -- the Morningstar-published standard reference for major asset class returns since 1926 -- the worst 10-year period for investing in large common stocks was 1929 through 1938. The return was an annualized loss of 0.9 percent, after including reinvested dividends.

The second worst period was 1930 through 1939, an annualized loss of 0.1 percent. The third worst period was 1928 through 1937, which registered a neat 0.0 percent.

The trailing 10-year return on the S&P 500 index was recently running at an annualized loss of 0.3 percent. There is a pretty good chance that when Dec. 31 comes around, the 10-year loss may be the worst in the last 74 years. If not, it will certainly be somewhere among the four worst 10-year periods.

Can we find any silver linings in this gloom?

Absolutely. Here are three.

• Tax-free investment gains in mutual funds. In past periods of heavy declines and fund redemptions, mutual funds have been forced to realize capital losses that could not be distributed. As a consequence, we will see thousands of mutual funds with capital loss carryforwards by early next year. This means you don't have to worry about buying a tax liability when you buy a fund. It also means you don't have to worry about a higher capital gains tax rate that may be coming. Many mutual fund investors won't see any taxable capital gains distributions until the next presidential election. The opportunity for tax-free returns will include bond funds as well as equity funds -- at the end of September, according to Morningstar, more than 400 municipal bond funds had capital losses of at least 10 percent of their portfolios.
• Zero-expense closed-end funds. Closed-end funds -- funds that sell on an exchange rather than through issuing or redeeming shares directly -- are now selling at serious discounts to net asset value. In other words, you can buy $1 of assets for 80, 85 or 90 cents. If you think of the 10 to 20 cents you didn't have to pay as a side fund devoted to earning enough to cover the cost of running the fund, many of these funds will have free or subsidized management. Here's a quick example. Recently, Adams Express (ticker: ADX) was selling at a 16 percent discount to portfolio net asset value. If that 16 percent earns only 2.8 percent a year, it will pay the 0.44 percent expense ratio for operating the fund. Another way to look at it is that you can now get the benefit of leveraging a portfolio without the risk of borrowing to do it.
• Reduced investment expenses. There is only one direction for mutual fund and exchange-traded fund management expenses to go -- down. Fund companies will respond to net redemptions and exchange-traded fund competition with expense reductions. Here's an example: Typical retirement target-date funds have expenses around 1.2 percent a year. Low-cost firms like Fidelity and T. Rowe Price deliver at about 0.70 percent a year. But Barclay's has just announced a family of target-date ETFs with expenses of 0.29 to 0.31 percent.

Q. I recently purchased a large (for me) amount of the Lehman 1 to 3 month Treasury bill ETF. How would you estimate the risk of that investment in light of Lehman's current financial position? Is this still safe, based on the Treasurys? Or is it high-risk because of being with Lehman?---L.B., by email

A.Not to worry. You’re nowhere near the wreckage. The Lehman 1-3 month Treasury bill ETF (ticker: BIL) is based on an index Lehman produces. The actual ETF is a SPDR (Standard and Poor’s Depositary Receipt) sponsored by State Street Global Advisors.

Q. I am 40, single, and my estate is worth around $300,000. I have never been married. I am thinking of getting married in the near future. My girlfriend and I are well-educated professionals. She says she is not interested in my money, and she does not want a prenuptial agreement. She is 33 years old. I am not sure about marriage without a prenuptial agreement. Do you have any advice? My estate has cash, one rental house, the house I live in, IRAs, CDs, two cars, and a 401(k).---B.M., by email

A. Most people have pre-nuptial agreements to protect the interests of their children from earlier marriages. And they only have them if their accumulated assets are substantial. You could protect a portion of your current assets by seeing an attorney and learning what you can make into “separate property” that would not be included in the marital estate.

That said, I find your concern disturbing. Marriage is a team effort. It is best started with an open heart, and without defenses. Your future wife will be an intimate part of the joint estate the two of you create. Even if she doesn’t work, marriage will endow her with spousal Social Security benefits. If she does work--- and you indicate that she does--- she will save and invest as you do. And living together will create “economies of shared living” that will benefit both of you. Your future wife is an asset in every sense of the word.

You may think I am a hopeless romantic, but if you are truly concerned about protecting your assets, you may not be ready for the promises you make on the day you marry. It is not hopelessly romantic to believe, as I do, that a good marriage can only be achieved when you embrace those promises without reservation.

Q. As of July 2008 I am 66 years old. I make about $90,000 per year, and I plan to work another two or three years. Should I file for my Social Security benefits now? ---W.R., by email

A. If you don’t need the money, don’t apply. With wage earnings of $90,000 a year, it is a virtual certainty that you’ll pay income taxes on 85 percent of the Social Security benefits you receive. So let’s do the math. If your benefit for the current year was about $1,750 a month, you would net $1,116 a month after taxes, and it would earn very little over a 12-month delay period. If you could earn 2 percent on that amount, tax-free, it would accumulate to about $13,500 in a year.

At age 67 you could use that money to buy an inflation-adjusted life annuity that would provide a monthly income no greater than $81 a month, if you were not penalized for such a small investment. (The figure I use is based on an investment 10 times larger.) About 75 percent of this amount would not be taxable, so your after-tax net would be about $76 a month.

The monthly increase in your Social Security benefit, achieved by simply delaying a year, would be 8 percent of $1,750 a month. That’s about $140 a month, 85 percent of which would probably be taxable. So your after-tax net would be about $110 a month. That means delaying by a year would give you about a $34-a-month advantage over trying to invest the benefits.