By Scott Burns

Q. This question is about your recent column on Social Security and Medicare. I'm an accountant in Austin. I will turn 60 in November. I have what I think is a fair amount put away in a 401(k) and an IRA.

It has been my understanding that our Social Security deductions were paid into Social Security and then loaned out. The federal government gives the Social Security fund an IOU. It has been well known that the Social Security fund would start collecting on those IOUs when the bulk of the baby boomers started to retire.

Since the government gets most of its money from income taxes (not Social Security taxes), when the Social Security fund starts collecting the money it is owed, then everyone's income tax rates will have to rise to make good on the IOUs and to make up for the shortfall in revenue from the employment tax. This is the reason, if I understand this correctly, that most of us don't think this is a problem.

Now I understand that in today's political climate this change will be something that will gag the Tea Party folks even though it was designed this way from the start.

Am I missing something? Making good on the IOUs will make income tax rates rise or make the deficit larger, or both— but isn’t that the way the program was designed from the beginning? —J.E., Austin, TX

A. No. Social Security has always had a "trust fund." Its contents were measured in a few months of benefit obligations. The fund could be used as a backup for recession periods when tax collections were down. It wasn’t adequate for big changes in benefit payments.

The purpose of the 1983 reform was to build a larger trust fund balance. The idea was to deal with the major increase in benefit commitments that would come when the boomers retired. Accumulation of a large amount— like the $2.6 trillion now in the fund— would make the program safe for the 75-year projection period.

With no actuarial deficit over that 75-year period there would have been no need to discuss raising the employment tax—or any other tax— to pay the benefits, if the government had not over borrowed for everything else. If we had had a balanced budget, the Social Security surplus could have paid down other federal debt. Then that credit could be used later to redeem trust fund assets.

But that didn’t happen. While retirees have a preemptive call on federal spending because of the trust fund, the only choices for making good on those promises will be to raise taxes, reduce benefits for future retirees, or print money. Worse, fixing the problem isn't just a matter of increasing the employment tax (or the income tax) to bring in the needed revenue. Check this paragraph from a summary of the recent Trustee reports:

"The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.67 percent of taxable payroll, up from 2.22 percent projected in last year's report. This is the largest actuarial deficit reported since prior to the 1983 Social Security amendments, and the largest single-year deterioration in the actuarial deficit since the 1994 Trustees Report."

Since the employment tax is 12.4 percent (employer and employee portions combined and not including the current 2 percent break for workers) we're talking about a 21.5 percent increase (2.67/12.4) in the employment tax to get the necessary money coming in. This would, in theory, make the program sound over the next 75 years. You don’t have to be a Tea Party member to rebel at the idea of that big a tax increase.

So there is also active discussion of cutting future benefits. As a result, today's workers could be paying higher taxes and getting less in future benefits. That’s not a very good "compact between generations." Worse, we've been told this before: 1983 reforms were supposed to make Social Security financially sound until 2060.

We should all remember that this is a wonderful problem to have. We have it because fewer children die, do we have smaller families and because we are all living longer. In "The Clash of Generations" (MIT Press, 2012) economist Larry Kotlikoff and I describe this as "Catastrophic Success."

We've succeeded beyond our wildest dreams in extending the gift of life. What we haven't done is find the courage to pay for it, either collectively through Social Security or individually through personal saving.

By Scott Burns

Should any of us own a managed bond mutual fund? Should any of us ever own a managed bond fund?

These rude questions came to mind as I read the most recent SPIVA report— that’s the regular report from Standard and Poor’s that examines the performance of managed funds against their chosen benchmarks.  The most recent report, covering the period to the end of last year, shows that managers of intermediate term government bond funds failed to beat their target index by a mind boggling 93.62 percent over the last five years.  They also failed 89.8 percent of the time in the five years from 2002 through 2006.

We’ve learned to expect that about 70 percent of equity fund managers will fail to beat their index benchmark. We’ve also learned to expect that bond fund managers are likely to do slightly worse.

But really, how can they stay in business with a 90 plus percent fail rate?

To be fair, there were some categories where managed bond funds did better. The best was the category “general short (term) funds” where only 60.54 percent of managers failed to beat their index over the last five years. But that was the best in the last five-year period. So in the best performing category, the majority of managed bond mutual funds still failed to beat their index.

Was there any light, anywhere? Yes. Of the 9 categories considered over two five-year time periods, a slender majority of emerging markets debt fund managers beat their benchmark from 2002 through 2006, the previous 5-year period. So it can be done. There is an exception to the rule.

So tell me: Can you name another area in life where we voluntarily pay a premium for a virtual guarantee of failure? That’s what we do when we buy managed bond mutual funds.

Now consider the portion of the return on your money that goes to the managers who are so adept at failure. Morningstar calls the largest category of bond funds general funds, with intermediate maturities. There are about 1,263 of them, of which 219 sell through front-end load commissions that average 4.12 percent and annual expense ratios that average 0.93 percent. At the end of March these same funds were providing an average yield of 2.36 percent. In other words, your commission cost exceeded your yield for nearly two years. After that, the managers got 39 percent of the yield on your money through fund expenses.

Another 219 of these funds had deferred sales loads. These are expenses that are recovered through high 12(b)-1 charges. The average 0.91 percent 12(b)-1 fee took the average expense ratio up to 1.62 percent. The current average yield on these funds was 1.65 percent. Here, annual expenses are about equal to annual yield, 1.65 percent versus 1.62 percent. This means the managers get the income while the investor gets 100 percent of the risk.

The remaining funds— no load funds that had neither front-end nor deferred sales commissions— had a lower average expense ratio, 0.74 percent, and a higher yield, 2.41 percent, than the funds available through the traditional brokerage sales channels. Even so, the management expenses absorbed 31 percent of the income.

What happens when you opt for a fixed income index fund? Things get better for you. You still have the risk of buying bonds at historically low yields. But without the burden of sales and management expenses, you get a better deal for income.

How much better? Lots. Averaging all 87-index funds in the category, the expense ratio was 0.33 percent and the yield was 2.44 percent. The cost of investing was only 13.5 percent of income. Invest with the larger and better-known bond index mutual funds or exchange traded funds and expenses could be as little as 5 percent of interest income.

In spite of these realities (which you won’t be told by your friendly salesperson because they are not encouraged to examine the statistics) millions of savers and investors still depend on commissioned sales people because they are afraid to make decisions for themselves.

Well, don’t be.

With a virtual guarantee of failure to beat an index from heavily marketed managers, we have no reason not to “go for it” and select a fixed income index fund.  Chances are about 9 out of 10 that you will do better.

By Scott Burns

Q. We have been retired for 6 years. We are beginning to question the fee for our rollover IRA. What should we expect as an average fee for fund management by a fee-based financial planning firm? Ours is a diversified portfolio of about $300,000. We also have a 10-year $200,000 annuity due to double by 2017. —M.D., Torrance, CA

A. In theory, what you pay will vary with the level of service you receive. But what you pay is also higher for smaller portfolios than for larger portfolios. Major brokerage firms like Merrill Lynch, for instance, are now discouraging brokers from handling accounts under $500,000 by reducing the commission payout brokers receive on such accounts. What you pay will also depend on whether your advisor is working in a fiduciary capacity or in a sales capacity. In general, those working in a sales capacity— earning some or all of their income from sales commissions— will cost more than those working in a fiduciary capacity. Here is a list, in descending order, of expenses you can expect:

• The Insurance Sales Channel. Products like variable annuities and insurance sold mutual funds tend to be expensive. Typical costs run well beyond 2 percent a year, not including sales commissions. Your annuity "due to double" in 2017 is a sales driven product. If you check the illustrations you were provided you’ll find that the actual cash value of your annuity is not going to double. The amount that doubles is used to determine your annual withdrawal rate. Such products have total costs of about 3 percent a year.
• The Legacy Brokerage Channel. The traditional brokerage houses— Merrill, Morgan Stanley, etc.— generally target making 2 percent on client assets a year. This can be done in commissions for trades. It can also be done with "wrap accounts" where you pay a percentage of assets under management to cover all expenses of the account. A $300,000 account would likely be charged about 2 percent a year.
• The Traditional Registered Investment Advisor Channel. RIAs are supposed to function as fiduciaries, always putting client interests first. Typical charges run from 1 percent to 1.5 percent but are negotiable, particularly for large accounts. RIAs may build portfolios of individual stocks but they are increasingly likely to build mutual fund or exchange traded fund portfolios. When this is done you need to watch the total cost.
• The Low-Cost Registered Investment Advisor Channel. These advisors seldom provide financial planning services, arguing that financial planning needs vary and should be done on an hourly basis rather than rolled into the cost of asset management. Some of these firms are Internet based. All-In expenses with these firms can be under 0.70 percent. This is the same as the expense ratio for some of the larger lifecycle mutual funds offered by firms like Fidelity, T. Rowe Price and American Century. These outfits will not walk your dog, but they do manage the assets.
• The One-Stop-Shopping Channel. Cost-conscious investors can also buy a single mutual fund that will give them a broadly diversified portfolio. The lowest cost options here are Vanguard Wellington and Vanguard Wellesley, both high performing, well-rated managed funds that cost less than 0.20 percent for Admiral shares. Some brokers in the legacy brokerage channel will offer you a similar fund from the American Funds family, such as American Balanced A shares which costs 0.62 percent a year but also involves a front end commission.
• The Do-It-Yourself Channel. The self-motivated investor can get asset management costs down to 0.10 percent, the cost of Admiral shares for the Vanguard Balanced Index fund. The same investor can build and manage a variety of "Lazy Portfolios" built with index mutual funds or with more widely available exchange traded index funds. These portfolios can be built at a cost of 0.15 to 0.30 percent a year, the average cost of the underlying funds.

With typical balanced funds now providing dividend and interest income of about 2 percent of portfolio value it is good to be very concerned with the total expenses your retirement nest egg faces. Basically, it comes down to a choice of who gets the income— you, or your money manager? Since there are major and well-known mutual funds that will manage a broad portfolio for you for less than 0.70 percent while showing long track records of superior performance, the burden is on anyone who costs more to demonstrate that they offer something to justify their additional cost.

By Scott Burns

The protestant reformation began in October 1517. That was when Martin Luther nailed his 95 theses to the door of a church in Wittenberg, Germany. Among other things, Martin Luther was protesting the sale of “indulgences” by the Roman Catholic Church.  Pay enough and ones’ sins would be forgiven.

A similar— but entirely economic and secular— protest may have occurred with the publication of the annual report of the Federal Reserve Bank of Dallas. The report calls for the end of Too-Big-To-Fail and the breakup of our largest banks. TBTF has led the big banks and those who run them to receive gigantic indulgences (not to mention economic salvation) at taxpayer expense.

Richard Fisher, the bank’s President, has given speeches about the TBTF problem since 2009. But in this report he states the problem and his position very clearly, right under his picture:

 “The too-big-to-fail institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF.”

No waffling or wimp talk there.

The 20 page essay that follows, “Choosing the Road to Prosperity: Why We Must End Too Big to Fail Now,” written by Senior Economist Harvey Rosenblum, lays out how the asset concentration in the top 5 banks has tripled from 17 percent in 1970 to 52 percent in 2010; the weakness of recovering and undercapitalized banks; why that has resulted in a weak economic recovery; and the likely failure of the Dodd-Frank legislation to end TBTF.

In one small text box, “TBTF: A Perversion of Capitalism,” Rosenblum summarizes the moral hazards and public damage caused by having institutions that are deemed too big to fail.

 “An unfortunate side effect of the government’s massive aid to TBTF banks has been an erosion of faith in American capitalism. Ordinary workers and consumers who might usually thank capitalism for their higher living standards have seen a perverse side of the system, where they see that normal rules of markets don’t apply to the rich, powerful and well connected.

 “Here are some ways TBTF has violated basic tenets of a capitalist system:

• “Capitalism requires the freedom to succeed and the freedom to fail. Hard work and good decisions should be rewarded. Perhaps more important, bad decisions should lead to failure— openly and publicly. Economist Allan Meltzer put it this way: ‘Capitalism without failure is like religion without sin.’
• “Capitalism requires government to enforce the rule of law. This requires maintaining a level playing field. The privatization of profits and socialization of losses is completely unacceptable. TBTF undermines equal treatment, reinforcing the perception of a system tilted in favor of the rich and powerful.
• “Capitalism requires businesses and individuals be held accountable for the consequences of their actions. Accountability is a key ingredient for maintaining public faith in the economic system. The perception—and the reality— is that virtually nobody has been punished or held accountable for their roles in the financial crisis.”

The left and the right of American politics don’t agree on much but there is one thing the Tea Party and Occupy Wall Street (not to mention the voting public) would joyously agree on—  Too Big To Fail has got to go. The idea of breaking up the big banks is adored by everyone but the bankers and the more conventional politicians the bankers so generously fund.

Are there alternatives to breaking up the big banks? Two come to mind.

One is for the boards of directors of the big banks to establish big time claw-backs on executive compensation so the top dogs can lose it all if they take excessive risks. Grant’s Interest Rate Observer editor, James Grant, advocated this idea in a recent speech at the New York Federal Reserve Bank.

Another is to adopt “limited purpose banking” in which banks are paid fees to connect borrowers and enterprises with lenders and investors, without taking risk. This is very much like what mutual fund firms do. Limited purpose banking would end the privatization of profit and the socialization of loss. This idea is advocated in “The Clash of Generations,” a new book I co-authored with economist Laurence J. Kotlikoff.

By Scott Burns

Q. My wife (75) and I (77) have approximately $800,000 in CD's. We are debt free and receive about $3,000 a month in Social Security benefits. We both work part-time earning a combined total of about $70,000 a year. Should we consider putting some of this money in the stock market? Could you advise me of the track records of the various investment companies and what percentage of the $800,000 would be prudent to invest. —D.T. by email

A. "The track records of the various investment companies" is a rather long subject. My personal position is that low-cost index fund investing is the path most people should take. It virtually guarantees we'll enjoy results that are better than 70 percent of the managed choices. You can do low-cost index investing through Vanguard, the leader in index mutual funds. You can also do it through any discount brokerage firm by using Exchange Traded index funds from a number of firms.

A simple, one-decision starter investment would be the Vanguard Balanced Index fund, Admiral shares (ticker: VBIAX). This fund is 60 percent domestic equities, 40 percent fixed income. The Admiral shares, which require a minimum initial investment of $10,000 rather than the standard $3,000 initial investment, have an annual expense ratio of 0.10 percent according to the Morningstar website. The fund returned 6.53 percent in the 12 months ending 4/27/12, better than 94 percent of its managed competition. This is exceptional, but not a fluke: Over the last 15 years the fund did better than 77 percent of it’s surviving managed competition.

Since your experience has been in CDs the big question is what portion of your $800,000 should be invested this way. If you committed half of your entire portfolio it would be 50 percent CDs, 20 percent bonds and 30 percent equities. That's a very conservative portfolio.

At a later date you might also consider buying a joint survivor life annuity. This would provide you and your wife with a guaranteed income for life. It would also mean you had retirement income from three distinct sources: Social Security, life annuity and investments. According to immediateannuities.com, for instance, you could add $18,000 a year to your lifetime income with an annuity commitment of $236,000. While it would take 13 years to get your original investment back, the joint life expectancy of a couple your ages is 16.8 years.

Q. My husband and I have $175,000 in CDs that matured this month. They represent almost 1/3 of what we have in savings, 401(k) s and IRAs. My husband will retire in a few years at age 66. Our retirement income will be $75,000 a year from his pension and Social Security. I plan to start taking Social Security in seven years when I am 62. This will be an additional $13,000 a year. Our house payment is $1,200 a month ($159,000 mortgage, to be paid off in 14 years).

Medical insurance is available through my husbands company after he retires (current retirees pay about $350 a month per couple). We own a rental property in California (owe $38,000 on mortgage) with a payment of $625 a month and association dues of $449 a month. The rental income is $1,600 a month. This is a potential retirement home for us. We have no other debt. We only have about $65,000 of our 401(k)/IRA savings in the stock market (mostly ETFs and blue chip dividend-paying stocks).

Due to our lack of faith in the market, we are reluctant to put any more money into it. Given that 5-year CDs are paying only 2 percent we don't know what to do with the $175,000. Any suggestions you have would be very much appreciated. —SW, Lakeway, TX

A. With what appears to be $525,000 in financial assets, having only $65,000 in equities strikes me as ultra-conservative. With a long-term base income of $88,000 (total of pension and both Social Security incomes), you've probably got a lot of your expenses covered, so you can afford to take more risk with your financial assets. But you'll need to think about that. In the meantime, consider things you can do to lower the interest costs on your debt— such as refinancing the first mortgage on your home and using a portion of that $175,000 in CDs to pay off the $38,000 of debt on your rental property. You might also consider buying new issues of 15 year Treasury Inflation Protected Securities as substitutes for CDs. While 10 year TIPS are priced to provide no yield over the rate of inflation, the rate of inflation is likely to exceed the yield on 5 year CDs or 10 year Treasuries.

By Scott Burns

Can you spell i-c-e-b-e-r-g?

Well, we’ve hit one and our ship is taking on water.

Two weeks ago the Trustees for Medicare released their annual report. The report, and the warnings it contained about the uncertainty of future costs, got some attention. But not nearly enough.

According to the report, the Medicare trust fund would be exhausted by 2024, only 12 years from now, under current law. Ditto the Social Security Trust fund. It will be broke by 2033, 21 years from now. When the Social Security trust fund is broke benefits will need to be cut by 25 percent. This, by the way, is the best-case scenario. As they did last year and the year before, the Medicare trustees express significant doubt that projected savings under current law will be realized.

Unfortunately, an event that appears to be more than a decade away doesn’t seem like an oncoming iceberg to those in Congress. For them it is many elections away. So the report disappeared as quickly as a bad movie.

But if anyone had read beyond the headline numbers, they would have learned that the Medicare and Social Security iceberg isn’t distant. It has already been struck.

The figures to prove it are in the same report.

Every year since 2004 devoted readers of the trustees report have found a section that explains how Social Security and Medicare trust accounting can be reconciled with the federal budget. This year it is Appendix F: “Medicare and Social Security Trust Funds and the Federal Budget.” It begins on page 234. You don’t need to be a CPA to understand this stuff. It clearly explains how the Trust funds relate to actual federal finance. It clearly shows what the politicians like to talk about— the trust funds. It also shows the actual cash flows we need to be worried about.

The feel-good story is that both Medicare and Social Security have reassuring trust funds that hold billions in Treasury obligations. The trust funds and the dedicated tax revenue that goes into the trust funds insulates them from the vulnerability that programs entirely supported by general revenues can experience. So if you are a senior on Social Security and Medicare, you are less vulnerable than most people who depend on federal spending.

But Appendix F tells us that Social Security and Medicare are becoming more dependent on general revenues at an alarming rate— to the tune of $402.7 billion last year. Last year is not 21 years in the future.

After years of surplus tax payments (mostly Social Security) that more than covered benefits, these programs now cost more than they receive in dedicated revenue. As a result, the surplus that allowed Democrats to do the spending they love—and Republicans to do the tax cutting they adore— is gone. Today, benefit payments are competing directly with other government commitments.

As I have pointed out in other columns, as long as the benefit costs of Medicare and Social Security were less than the taxes collected, things were fine. But the net cash cost of Medicare and Social Security— the amount by which benefit payments exceed dedicated tax collections— has nearly quadrupled since the last Presidential election, rising from $108.7 billion to $402.7 billion. Since our total deficit is about three times that $402.7 billion figure, it is reasonable to say that our two largest government programs are now directly responsible for about a third of current government borrowing.

This gigantic shift has already happened. It is history, not projection. As recently as two Presidential elections ago the cash cost of Social Security and Medicare was practically nothing— a mere $41.1 billion.

Here is how Trust surpluses compared with the actual cash cost in the federal budget:

Source: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html?redirect=/ReportsTrustFunds/

The reported surplus of the trusts, mostly credited interest on their holdings of Treasury securities, show a happy number. Politicians of both parties use these figures routinely. The actual cash impact is virtually never mentioned.

The iceberg isn’t on the horizon. We’ve already hit it. Both parties should answer for it.

Sidebar:

Want to learn more about how our government accounts for Social Security and Medicare?

Scott Burns, “The Big Double Whammy,” 7/09/2011

This column discusses the appendices explaining the difference between trust accounting and cash accounting for federal finance.

Scott Burns, “Making Things Right,” 2/18/2011

This column calculates how much extra a typical work has paid in taxes to support the Social Security and Medicare surpluses that Congress has spent and replaced with Treasury IOUs.

Scott burns, “Future Medicare: Cheap, But Not Available,” 8/13/2010

This column discusses how Richard Foster, the chief actuary for Medicare, has written a disclaimer saying that the Medicare expense reductions required by law were highly unlikely. So Medicare didn’t lose $15 trillion in unfunded liabilities simply because members of Congress voted for thousands of pages they never read.

Scott Burns, “Representation Without Taxation,” 8/07/2009

This column examines the growth of unfunded liabilities for Social Security and Medicare between 2004 and 2009 and compares them to both public federal debt and consumer net worth

Scott Burns, “Government, The Big Magician,” 11/16/2007

This column shows how federal deficits appeared to be smaller than they really were by comparing growth in federal debt to the magically smaller federal deficit. The difference, for the most part, was book entry crediting of interest to the entitlement trust funds.

Scott Burns, “This Year, a $3 Trillion Lump Under the Rug, 5/14/2006

This column compares the increase in Social Security and Medicare unfunded liabilities with a much smaller number, the increase in federal debt.

Scott Burns, “The Overlooked $2.3 Trillion Deficit,” 6/05/2005

“Let me be circumspect:,” this column begins, “government accounting is vile garbage.” Examining the unfunded liabilities of Social Security and Medicare over both 75 years and the more realistic, but far larger, “infinite horizon.&rdquo

If you would like to read more on this vexing subject, read “The Clash of Generations,” now available on Amazon where it recently ranked in the top 10 books in Finance, Economic Conditions, or Popular Economics.

Q. I'm 46 and have been working since I was 24. I have always been a saver, so I have about $850,000 accumulated in various accounts. I'm married and have two kids in the 8th and 6th grades. My husband and I manage our money separately because we have different investment styles (So this $850,000 is entirely mine, although I understand there is no such a thing as "mine" while we live in Texas). I also have a $50,000 emergency fund in cash.

That $850,000 is in investment accounts split between Vanguard and Ameritrade. Over time these accounts have become cluttered with too many funds and stocks (some were carried over from when I worked with a Chase financial advisor).

Since my kids will be going to college in 4 to 6 years, I probably should be less aggressive, even though I always feel that I can be aggressive until I retire (probably when I turn 60). This belief stems from my earning power - I have always been working. Currently I make $92,000 a year. I used to contribute 25 percent to my company 401(k) until a month ago when I lowered it to 15 percent. I get a 3 percent match from my company.

With my kids getting into their teens and becoming difficult, I’m considering taking a year or two off to be with them. Would this change how I should invest my money? —C.T., Dallas, TX

A. You clearly have a good grasp of your situation and the decisions that need to be made, though I might add that in marriage, regardless of where you live, “ours” trumps “mine.” It’s a marital life condition that is far more important than the laws of any state.

The first thing you should do is consolidate to one firm. This does not mean consolidate all your accounts, it just means combining as many accounts as possible at the same firm. Doing so will make electronic access easier. It will also allow you see the big picture. My wife and I, for instance, have all our investment accounts housed at a single firm, as well as a checking account. It works well, particularly with getting information online.

Once the consolidation is done you'll need to do some "heavy lifting" and estimate how much of your $850,000 is needed for coming college expenses versus how much you can consider long term/retirement money. This isn't a simple task because there is a big difference between the cost of the University of Texas and the cost of, say, Stanford or Harvard or Duke. The more of your existing long-term investments you can leave in place, the better.

The college fund should be kept in safe investments even though they are likely to earn very little. The retirement money should be invested with an eye toward return and growth at an acceptable level of risk. For lots of people hoping to retire within 15 years that would be a balanced fund, 60 percent equities/40 percent fixed income. With assets in reserve for education, you might be a bit more aggressive than that.

When it comes to financial planning, talking about nominal dollars isn't very useful because inflation makes past incomes look silly. Late in the 1960s, for instance, Fortune magazine published an article titled “The Good Life Begins at $25,000 a Year.” The article showed the percentage of such households that went on overseas vacations, bought good wines, had country club memberships and owned luxury cars. Today, a Texas couple with that income would be eligible for a small monthly benefit in food stamps.

So you need a metric, a framework and a unified plan for your future. Let me explain. Your $850,000 is about 12 years of what you spend from your income ($92,000 income less $23,000 saving). In fact, the multiple is somewhat larger since you don't need to replace employment taxes when you retire and you won't be spending the money you now spend on the kids when you retire. So, relative to most people, you are well ahead of the game. In fact, if you were driving at Indianapolis, you’d be lapping the crowd. So if you want to take a year or two off, feel free, but it would have no impact on how your nest egg is invested.

You and your husband may have different investment styles but you still need to be on the same page when it comes to your long-term planning as a couple. If he is as diligent a saver as you, for instance, your savings as a multiple of your spending as a couple (excluding costs of the children) may be still higher than 12 years of income. Together, you should be looking for combined assets of 20 to 25 years of your expected retirement spending, including taxes. This multiple can be adjusted downward if you factor in the value of Social Security benefits, even if you take them at age 62.

By Scott Burns

Allow me to introduce Life Capital Decisions. These are the decisions we can make that change our lives and improve our standard of living. While some of these decisions can, and should, be done while we are as young as possible, others bring the greatest benefits as we approach retirement.

How big can those benefits be? Huge. The benefits are so large that I would like to propose a new measure for them, the Lifetime Savings Equivalent. We are talking about decisions that can be worth as much, or more, to our standard of living as every dime we put away in 401(k) plans and IRAs. We don’t need a President or Congress to make these decisions. We don’t need our employer to make these decisions. These are decisions we can make on our own, whenever we want, without any outside help from the sources that have been so disappointing over the last 10 years.

Skeptical?

I don’t blame you. But I’ve been studying and writing about this for a long time. I now believe that most of us can do as much, or more, for our futures through personal choices that don’t involve saving and seeking good returns as we can through all the hopes we have for our savings.

One reason I can say this with confidence is that the Lifetime Savings Equivalent isn’t a lot of money. According to the latest Retirement Confidence Survey done by EBRI, the Employee Benefit Research Institute, only 22 percent of all workers 55 or older had total savings and investments of $250,000 or more. Another 18 percent had total savings between $100,000 and $249,000. At the other end of the scale, 40 percent had total savings under $25,000. So any life decision with a value between $25,000 and $250,000 should get the attention of the millions of people who still work for a living.

Here are a few examples of some big Life Capital Decisions:

I know I harp on this, but the financial services industry is still spending millions to convince us that high expenses win higher returns and benefit us. That wasn’t true when returns on savings were high. It certainly isn’t true now. High expenses buy brokers lunch and make their Mercedes payments. According to recent Morningstar data, the average balanced fund has a trailing yield of 1.73 percent and a net expense ratio of 1.35 percent. In other words, the managers get 78 percent of the income; we savers get 100 percent of the risk. Like the country and western song, they get the mine, we get the shaft.

Today it is easy to manage our savings for less than 0.20 percent a year. We don’t need to do market timing; we don’t need to have the vaguest idea of what we are doing. We only need some degree of diversification. Simply going from an expensive investment plan to an inexpensive one can increase our lifetime nest egg by about 40 percent— an amount equal to about 15 years of accumulated contributions.

Inexpensive investing, in other words, can make up for years of missed savings, major market losses and other disasters.

Spend Carefully.

Whether it is the miles per gallon of the car we drive or attention to medication costs, careful spending brings good results. Without even considering taxes, every $100 a month not spent eliminates the need for $30,000 of retirement assets, which is more than 40 percent of all workers have in savings.

Make Good Social Security Benefits Decisions.

A page on the Social Security website shows that a person with a monthly benefit of $750 at 62 would have a benefit of $1,000 at 66 and $1,320 at 70. That’s an increase of $570 a month or $6,840 a year. To get the same lifetime income from savings would require as much as $171,000. So most workers will benefit more from deferring retirement for 8 years than they would benefit from a lifetime of saving.

Make Powerful Shelter Decisions.

In my new book with economist Laurence J. Kotlikoff (“The Clash of Generations,” MIT Press) we show that a retiring middle income couple can have lifetime discretionary spending— spending after income taxes, Medicare premiums and shelter— of about $15,000 a year if they stay in their home. They can increase it to $28,600 by selling their home and becoming renters. And they can boost it to $38,800 by becoming fulltime RVers. Just the difference from owning to renting, $13,600 a year is the same as adding about $340,000 to their savings.

If they really wanted to “go the distance,” becoming RVer’s could be like adding $590,000 to their savings.

Unlike all the things that are so frustrating to so many of us today, these choices are ours and ours alone.

By Scott Burns

Q. I am 25 and have been working my first corporate job since I was 22. During that time I have invested $15,000 in my 401(k) plan. I stopped contributing to it last November. I will be leaving the company at the end of this month and need advice on what to do with my 401(k) balance. Currently, I have a little under $9,000 in student loans that I would like to pay off. I was thinking of liquidating my 401(k) to do that. What would you suggest? Should I keep the money where it is? Should I pull it out and roll into a Roth IRA? Or should I use it to pay off my student loans? —B.S., by email

A. There are two reasons you should avoid cashing out your 401(k). The first is that you will pay a penalty of 10 percent since you are not 59 ½ years old. You’ll also have to pay income taxes, assuming you are leaving your current job for another job and will have taxable income for the year. The second is that it's good to have money in qualified plans and it would take a while to rebuild.

I know investment returns look pretty "iffy" right now, but they almost always do. If you consider our history in the last 100 years, there have been lots of reasons to fear for the future and believe that investing would not pay off. But it has. In general the best time to invest in equities or real estate has always been the same: “Long Ago.” The money in your account has the potential to double 5 times by your 70th birthday, which will probably be the age of (early) retirement by around 2050.

The 5 doublings figure is based on a compound annual return of 8 percent. That's less than the long-term return of equities and close to the long-term return of a traditional balanced portfolio. So your $15,000 could become $480,000, before adjustment for future inflation.

With that in mind, my suggestion is that you roll your 401(k) to an IRA with low cost mutual fund options. You could also move to a discount broker to give you access to even lower cost exchange traded index funds. After that, focus on paying off your student loans out of what you earn in the next few years, perhaps by reducing the new money you put in a new employer provided 401(k).

Q. In 2006, I was talked into a variable annuity by a Merrill Lynch advisor. I've since moved my other assets to a Wells Trade account that I manage myself, with emphasis on low-cost Couch Potato investing.

The Couch Potato portfolio is a thing of beauty, and I'll tell you, it demonstrates how simple investing can be— but I still have a problem. I've read many articles about variable annuities, but no one ever gives tips for getting out of one.

Right now, my variable annuity has a value of $315,435, and my cash surrender value is $306,435. My original contribution was $300,000. How hard is it to get out of a variable annuity? Would now be a good time to get out? Can I even get out? I'd really rather have the money in my Couch Potato account. I'm 51 and won't need this money for another 15 years. Where can I look for answers? —R.S., by email

A. Assuming this is not qualified plan money, you can do what's called a 1035 exchange, moving the money from one variable annuity to another without creating a "taxable event." Exchanging to the Vanguard variable annuity would reduce expenses significantly and allow you to become a tax-deferred Couch Potato investor. The total cost for the Vanguard variable annuity is about 60 basis points, 0.60 percent.

But since your surrender value is only $6,000 over your cost basis, deferred taxes aren't a big problem. You can reduce expenses still further by redeeming your investment, paying taxes on the $6,000 of investment gain and moving directly to your existing taxable account. This will reduce your annual expenses to about 0.20 percent, probably about one-tenth of what you are currently paying.

You'd be hard pressed to find anyone complaining, today, of how much taxable income his or her investments are yielding. In addition, broad index mutual funds or Exchange Traded Funds are very tax efficient. That's one of the reasons Couch Potato investing beats the vast majority of comparable risk variable annuity commitments.

By Scott Burns

“I still love high heels and fashion, but I am also thinking… is there anything I can conceal a weapon in?”
—Megan, a Doomsday Prepper

Is this a great country, or what? Instead of just letting us wallow in our personal worry about the future, the National Geographic Channel has created “Doomsday Preppers” to show all of us how other ordinary Americans are preparing for an apocalyptic future. Good preparation generally involves learning how to use a gun since it is assumed that we will all be less than civil when the big day comes.

The source of that apocalyptic future is generally blamed on runaway government debt, hyperinflation and the resulting chaos. This, I believe, is an indication that Doomsday Preppers have a lot in common with you and me. In my 35 years of writing a personal finance column reader letters have never been more worried about the Big Picture future. Worries about our personal Little Picture future are being crowded out by frustration with the economy of the last decade.

My bet is that our future will have more whimper and less bang. That will make it less dramatic than anything most of the Doomsday Preppers are preparing for. But it may not make it much less difficult.

At least, that’s what I think when I go to McDonald’s.

There, I compare my Social Security check with the pay of those who work there. As I have pointed out in other columns, the average monthly Social Security check is now $1,230. It is not subject to the employment tax and at age 65 you also get great health insurance for only $99.90 a month.

Workers at McDonald’s, which is hiring, earn about $8 an hour, pay the employment tax and, most often, don’t get health insurance. Just as some once asked how many cars $60 an hour workers in Detroit could expect to sell to $8 an hour workers in Peoria, we need to start worrying about whether millions of uninsured low wage workers will be capable of supporting the growing millions of well insured retirees who no longer work.

Some older readers will quake when they read this; so let me assure you that I’m not writing about this to beat up on seniors. I’m writing about it because the growing imbalance between the young and old is a big issue. It’s so big it won’t be solved by such reliable cures as “eliminating waste, fraud and abuse,” cutting defense spending, or building a modern Maginot line along our border with Mexico.

Here’s the problem: The largest single part of government spending is Social Security. Add Medicare, Medicaid (most of which is spent on the elderly) and government pensions and about half of all government spending is a transfer from people who are young and (mostly) working to people who are old and (mostly) not working.

In itself, this isn’t a bad thing. Fifty years ago there was no Medicare. Back then retirement, for most people, was synonymous with poverty. We needed to change that, and did.

Today, things are different. For starters, only 10 percent of the elderly live in poverty today, but 21 percent of all children live in poverty. Now consider a few other facts:

• Student debt now exceeds consumer debt. The young are having trouble finding jobs, in part because so many older people need to hold on to their jobs.
• The young pay twice as much, as a multiple of income, as today’s retirees paid for their houses when they were young, if they can buy a house at all.
• A growing number of states now spend as much on jails and prisons as they spend on education.

What’s coming our way, very rapidly, is a clash of generations. That’s why I believe our future will have more whimpers than bangs. The young don’t want to kill the old and the old don’t want to oppress and enslave their children. But if we’re going to avoid that fate, we’re going to have to understand how current policies are not working. Then we’ll need to make changes.

Want to know more? Good.

I’ve written a lot more. If you’ll forgive a craven plug, you can read “The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy.” Co-authored with economist (and presidential candidate) Laurence J. Kotlikoff, my new book lays out the problem, the policy solutions… and how to protect yourself if the policy solutions don’t happen.

By Scott Burns

Q. My brokerage firm advisor just put my teacher retirement annuity in a Sun America variable annuity. He did not use the term, "variable annuity" in our meeting. I signed the paper work last week, but I have thirty days to return it because it replaced another annuity contract of seven years ago (another mistake). What should I do? —A.L., Dallas, TX

A. The vast majority of the products on the approved list of the Texas Teachers Retirement website are from insurance companies because annuity contracts have dominated this area since its inception. Today, however, you also have access to non-annuity products from lower cost, no commission firms like Fidelity and Vanguard.

The most likely reason to change what you owned was the salesman's incentive to generate a new commission. If you were told that the change was suggested because of the wonderful new guarantees in more recent contracts, such as living benefits options, find out how much it has increased your annual costs. Living benefits options work to increase already high variable annuity costs by about 0.50 percent a year. I have demonstrated, in other columns, that a better and more flexible choice is to combine a traditional life annuity with a low-cost index-investing plan, such as the Couch Potato portfolio.

Here is what I suggest:

1. First, exercise your right of rescission immediately. This means call him and cancel the sale. Do what it takes to make this happen, which probably means writing a letter that states you want the sale cancelled. Do not delay. This action will avoid subjecting you to a whole new set of penalties for early withdrawal. This can save you 8 to 10 percent.
2. Your next step depends on whether or not you are still teaching. If you are still teaching, just getting back to where you were may be the best you can do. While the Texas Teachers Retirement list of approved firms lists some low-cost firms as well as high-cost annuity products, what you actually have access to will depend entirely on your independent school district. If Vanguard or Fidelity is available, consider transferring your current investments to a lower cost fund with one of these firms.
3. If you are no longer teaching you have a lot more freedom because you are at liberty to move your 403(b) account to an IRA Rollover. This will allow you to shift out of the expensive variable annuity product into low-cost indexed funds or a low-cost managed fund such as Vanguard Wellington or Fidelity Puritan. Both are balanced funds.
4. Finally, if you are still working, redirect your ongoing 403(b) plan contributions to a low-cost provider if one is available in your school district.

Most of the people who sell the expensive commissioned products soft-pedal the impact of costs. They will attempt to make you feel silly for being concerned about how much costs will affect your long-term results. They will also tell you that superior management cost more, but will fail to mention that 70 percent of all managed funds fail to beat their target index.

There is a reason I may seem to obsess over cost— and I am not alone. Recently, the Texas State Securities Board launched an educational effort directed at teachers. (http://texasinvestored.org/voi/index.html) It is brief, very instructive and lets you know that costs do matter.

To get a visceral feel for the impact of costs I suggest you visit their on-line calculator and put in two sets of values to see the difference expenses can make. You can do this by visiting www.texasinvestored.org/expenses_mutual_fund_returns.php

Here is a sample comparison using this calculator. One teacher invests $10,000 in an expensive product that costs 2.00 percent a year and has a front-end commission of 5 percent. The product has a pre-expense return of 8 percent. At the end of 30 years that teacher will have $52,146. Another teacher does some homework and invests in a no-load index fund that costs one-tenth as much to run, 0.20 percent. This fund also has a pre-expense return of 8 percent. At the end of 30 years this teacher will have $94,761.

By Scott Burns

Reverse Mortgages are the Rodney Dangerfield of financial planning tools. Long thought of as things retirees used in last-ditch efforts to stay in their house, they were seen more as leaky lifeboats than as financial planning tools. They were badges for people soon to be broke.

I should confess that I shared that view. Based on reader mail, reverse mortgages were great examples of too-little-too-late. The vast majority of the people who wrote in asking about reverse mortgages really needed to rethink where they lived, not draw down what was usually their last asset.

But all that may be changing.

If a recent Journal of Financial Planning paper gets traction, the use of reverse mortgages will move from people who are desperate to practical people who have both home equity and some financial assets. This will happen for a totally unexpected reason. Retirees can use a reverse mortgage as a tool for increasing the probability they won’t outlive their assets while increasing their retirement spending. In other words, if reverse mortgages are used early, rather than late, they can be as important in the retirement planning toolbox as life annuities.

Barry H. Sacks, a San Francisco tax attorney and Stephen R. Sacks, a professor emeritus of economics at the University of Connecticut (and the brother of Barry Sacks) made this discovery by thinking differently about financing retirement. Rather than wait until all financial assets were exhausted and then taking out a reverse mortgage, they asked how things would turn out if retirees took out a reverse mortgage first or early. This would allow them to use withdrawals from the reverse mortgage to delay or reduce withdrawals from financial assets.

None of this matters, they found, if the retirement income withdrawal rate was set at an initial 4 percent, with the amount adjusted upward for inflation in each succeeding year. In that case, there was a 90 percent chance that investment money alone would last through 30 years of retirement. Things change, however, when you up the withdrawal rate, as many retirees need to do. When the withdrawal rate is increased they found that using a reverse mortgage increased the odds of remaining solvent throughout life.

Taking a 6 percent withdrawal rate and using a reverse mortgage first or early, for instance, provided an 80 percent probability of “cash flow survival” for 30 years while using a reverse mortgage last provided only a 50 percent probability of cash flow survival. Similarly, taking a 6.5 percent withdrawal rate and using a reverse mortgage first or early provided a 70 percent probability of cash flow survival for 30 years while using a reverse mortgage last provided only a 40 percent probability of cash flow survival.

Surprisingly, this enormous increase in retirement income seldom comes that the expense of net estate value. In a majority of cases they found net worth at the end of 30 years (remaining home equity and remaining retirement assets value) was greater as often as three-fourths of the time. In other words, you can eat cake and still pass some on to your kids or favorite charity, too.

Curious about how this can be? Well, I think there is an explanation. Just as John Ameriks and others found a decade ago that converting a portion of your retirement assets into a life annuity could increase the probability of portfolio survival, using a reverse mortgage early in retirement works to reduce the impact of bad markets in the early years of retirement— what some call “the sequence of returns problem.” Just as the high cash flow from a life annuity can work to reduce portfolio withdrawals early in retirement, a reverse mortgage— taken early— does the same thing.

Sadly, both Wells Fargo and Bank of America decided to withdraw from the reverse mortgage market last year and they accounted for 43 percent of all reverse mortgages written. They withdrew because some reverse mortgage customers liked the lack of mortgage payments so much that they also failed to pay the home insurance and real estate tax bills. This left the banks exposed and vulnerable on one hand, but faced with a nasty PR problem— foreclosing on ancient homeowners— on the other.

If the mortgages had been given early to people with other assets rather than late to people with no other assets, the big banks might never have left the market.

By Scott Burns

Q. I have three target 2020 retirement funds, one each at Vanguard, Fidelity and Schwab. Each is worth about $300,000. I am 64 years old and would like to retire in a few years. A wise thing to do might be to "ladder" these funds, converting one to a 2015 fund, the next to a 2025 fund, and the last to a 2035 fund. The plan would be to withdraw, say, $30,000 a year from the earliest fund until it is depleted and then move on to the next fund. What do you think? How risky is this? —D.Z. by email

A. I don't think this is a meaningful set of actions. The fundamental question is how much will you be spending from the total portfolio? And is that a reasonable rate? Your withdrawal rate of $30,000 from a total portfolio of about $900,000 is only 3.3 percent. This is quite conservative.

A second fundamental question is: What is the asset allocation of your total portfolio? Building a ladder of target funds or having baskets of assets is an arrangement that may not change your basic asset allocation. If, for instance, you put equal amounts in a 2015 fund, with relative high equities; a 2025 fund; and a 2035 fund with relatively low equities, your actual asset allocation would be similar to having all the money in the 2025 fund because the three funds would average about 2025. Another matter to consider is that different fund firms have different asset allocations for the same target retirement date.

Q. What is your opinion on a variable universal life (VUL) policy? I am about to turn 30. I have had a 403(b) since I started teaching 5 years ago. My financial guy now wants me to start a VUL with his company on top of TRS (Teacher Retirement System). I already have a whole life insurance policy of $200,000 through my insurance company. What should someone like me do: a Roth IRA or this VUL policy? I get the cost of insurance back with the VUL. I would like to do one or the other because both are tax-free when I start drawing money out and I like that. —G.S., Garland, TX

A. Variable Universal Life policies vary a great deal in their expenses and commission burden so it's dangerous to generalize. You or your salesman, however, may have put the cart before the horse. The most important starting question when considering life insurance is this:

Do you need life insurance and, if so, how much do you need and how long will you need it?

For most people the need for life insurance is temporary. It is greatest when you are young and have unfulfilled commitments to a spouse and children. That can be done with a term life policy. It will provide coverage while you need it at very low cost. If your "financial guy" is offering a life policy primarily as an investment vehicle the best I can say is that his judgment is clouded by dreams of a commission.

Many people jump at the "tax-free" aspect of making withdrawals or borrowing from a cash value life policy. But they are failing to ask whether the cost of the policy is greater than any tax rate they may ever face.

Let me give you an example. Suppose the insurance costs related to a policy are 1.5 percent a year of cash value. Then your cash value would have to earn at a gross yield of 10 percent of cash value before the cost burden would be only 15 percent. In effect, you would be paying the insurance company what you might otherwise pay in taxes if you were investing in a taxable account. If the gross return were 6 percent, you'd have an effective tax rate of 25 percent, which most teachers don't have.

If you examine the projection of values for the policy you will find that the insurance costs of the policy as a percent of cash value are much larger than 1.5 percent a year. You don’t get the cost of the insurance back; you get a lower return on your cash value than you otherwise might have had.

Bottom line: go for greater flexibility. Look for a low-cost vehicle for a Roth IRA. While most of the certified providers on the Teacher Retirement System of Texas list are high cost burden insurance companies you'll also find Fidelity and Vanguard on the list. Sadly, they are not available in all school districts.

By Scott Burns

How would you like to double your retirement spending?

Well, Michael Finke is working on just that. He thinks we may be able to live better in retirement than most professionals have thought for nearly two decades. The Texas Tech University associate professor, along with two other researchers, Wade D. Pfau and Duncan Williams, has examined William Bengen’s well-known 4 percent safe spending rule and found that some retirees, perhaps many, can spend a lot higher on the hog. Simply raising the spending rate to 6 percent means you can spend 50 percent more.

“By emphasizing a portfolio’s ability to withstand a 30 or 40 year retirement,” the researchers write in the March issue of the Journal of Financial Planning, “we ignore the fact that at age 65 the probability of either spouse being alive at age 95 is only 18 percent.” As I pointed out in a recent column, it’s silly to have 95 percent confidence in your income when your chance of being alive is much smaller.

Excessive caution, he told me in a recent interview, means we buy long-term security at the expense of giving up many things we’d like to do today. We leave estates that are larger than planned and feel remorse for experiences we’ve missed.

So the researchers reframed the dilemma. Putting investment results in the framework of our life expectancies, they asked this question: If you withdrew at a greater rate, what percentage of your remaining years of life at age 65 would you be broke?

While most people would not want to risk going broke early in retirement they might feel differently about going broke at 85 or 90 if it would change their life in the intervening years. Here is what they found for a couple where both are retiring at the same age, 65.

• At a 4 percent withdrawal rate the couple was virtually certain to avoid going broke with a portfolio that ranged from 30 percent equities to 60 percent equities. Even with less, or more, equities, they were likely to spend less than 2 percent of their remaining years of life without wealth.
• At a 6 percent withdrawal rate the risk of going broke increased, but a typical balanced portfolio of 60 percent equities, 40 percent fixed-income securities reduced the percentage of years without wealth to about 7.5 percent of expectancy. In other words, they could spend 50 percent more for 92.5 percent of their remaining lives by accepting the risk of living in reduced circumstances for the remaining 7.5 percent.
• At a 7 percent withdrawal rate the risk of going broke rose further, to about 14 percent of remaining years of life— if their portfolio was 70 percent equities. For other allocations, up or down, the risk was somewhat higher.
• At an 8 percent withdrawal rate— a rate few financial planners would suggest— the couple would face living 20 percent of their remaining life without wealth if their portfolio were 90 percent equities. Note that as the withdrawal rate has increased, the optimal portfolio allocation has also increased. A retirement portfolio that is 90 percent equities is a real “swing for the fences” portfolio.

Recall that the joint life expectancy of a 65-year-old couple is about 25 years. So we’re talking about living better for a lot more years than they would be living at a lower standard. The 8 percent withdrawal couple, for instance, could enjoy 20 years of doubled spending at the expense of 5 years of being broke, starting at age 85. Since we tend to reduce spending as we age, the loss of wealth and income could be less of a hardship than it might seem.

The researchers caution that since women live longer than men, more of the risk burden would fall on women. That may be an understatement. In a 65-year old couple the first death is likely to occur at 15 years, leaving the surviving spouse another 10 years of life. A thoughtless husband could suggest a 9 percent withdrawal rate, knowing they’d spend well while he was alive and the lean years would fall on his widow.

The researchers also considered another factor— assured income. If retirees have a “floor” income for their lifetimes from a combination of Social Security, pension and life annuities, they can think about running out of wealth before death with less worry than if their only lifetime income is from Social Security.

By Scott Burns

Q. I have been dealing with a credit union for my investment needs and have some concerns. The folks there seem to focus on annuities (both fixed and variable) to the exclusion of other products. Is this because they have tie-ins to insurance companies wherein generous commissions apply to salespeople? I have inquired about no-load mutual funds, with the response that no-load funds have offsetting fees that load funds do not have. They also say that many of the load funds are superior to no-loads.

I have approximately $100,000 to invest. I am 78 years old and do not want a lot of risk because of my probable limited investment horizon. —R.M., by email

A. There is a slender, but useless, element of truth in what you have been told. Some load funds are superior to no-loads, just as some no-loads are superior to load funds. You have better odds of a superior performance choice with lower total costs than with higher total costs.

Whether we are talking about credit unions or banks, unless you are making a deposit or withdrawal you are probably engaging in a sales process that involves a commission. This is not a sin. The operations that sell mutual funds and annuities were set up to generate income and make a profit for the institution. That's why they don't sell no-load mutual funds.

Sadly, rather than explain they are a business, they lie and tell you things that are not true.

Here's the reality: financial products have multiple distribution channels. There is a no-commission, no-load channel that is structured to keep expenses down. It is suited for do-it-yourself investors.

There is also a load channel that serves people who need help with decisions. It has more expenses, some of which are absolutely irrelevant to providing you with good service. Neither are those additional expenses a guarantee of good advice or good choices.

If you want to avoid commissions, go to a place where commissions are either small or non-existent. You can do this quite easily at Fidelity, Schwab and Vanguard.

Your limited investment horizon also means commission driven sales put load products at a great disadvantage. In a world that yields 2 percent or less, it's hard for a 78 year old to justify giving up 3 full years of income to pay a 6 percent sales commission.

Q. I recently fired my money manager in favor of managing our retirement funds myself using your basic Couch potato portfolio. But everything I read lately says that one should be cautious before investing in TIPS—half of your basic Couch Potato— over the near future. One article says that TIPS investing has been beneficial over the past year, but that Federal Reserve actions should make them a not-so-good investment in the near future.

Is there another bond-related index fund we should look at other than the Vanguard Inflation Protected Securities fund? Should I consider putting a portion of the money in the TIPS fund, but further diversifying to spread the risk 3, 4, 5, or 6 ways? I am, obviously, a bit nervous taking this on myself. —L.M., Dallas, TX

A. The Vanguard Treasury Inflation-Protected Securities fund has provided a higher return than the Vanguard Total Bond Market fund over trailing time periods out to 10 years. The additional return can be attributed to how much investors have "priced up" inflation protected bonds as they understood their advantages. When TIPS were first issued, for instance, they were priced to yield a 3-percentage point premium over the inflation rate. Today the premium is actually negative, meaning your "return" will be somewhat less than the rate of inflation. Even so, TIPS are likely to provide a higher "return" because the rate of inflation is very likely to be higher than the coupon you would earn on a traditional Treasury.

According to recent figures from Bloomberg a 5-year conventional coupon Treasury was yielding about 1.1 percent. A 5-year TIP was priced to yield inflation less 1.27 percent. So the TIP will be a better investment if inflation runs higher than 2.37 percent over the next 5 years. As a practical matter, both investments are a form of robbery-by-government, but the TIPS investment gives you a better hedge if you are concerned about future inflation.