Q. My wife and I are nearing retirement, maximum two years away. In his recent letter to stockholders, Warren Buffett said that investment returns from 1901 to 1999 averaged 5.3 percent plus 2 percent additional for dividends. He described this time period as a very good century.

He also said that if expectations are that investment returns for the next 100 years will match the previous 100 years, then the Dow would have to close at around 2 million in 2099. He said many investment advisers talk about 10 percent or better returns to their clients. If investors expect 10 percent, then the Dow would have to close at 24 million in 2099. He also is very suspicious of pension plans that are based on an average of about 8 percent compounded returns.

I guess what I’m asking is--- should we find the safest, highest-yielding corporate, Treasury or municipal bonds that we can find, or do you think the stock market is still a good bet for retired people? How should we be investing our 401(k)s ($425,000) after retirement? Currently, we are invested 25 percent cash, 30 percent fixed and 45 percent equities. ---J.K. by email from Plano, TX

A. Buffett isn’t alone in his expectations of lower future returns for equities. Rob Arnott makes similar projections of lower returns, concluding that 8 percent is probably on the high side. Ditto John Bogle. The fundamental cause for a reduced future return is that dividend yields are significantly lower than in past periods--- and they have accounted for much of the historical return.

But remember, stocks should always be measured against their fixed-income competitors. Current fixed-income yields are very low. In bonds, most of the return comes from the current yield. As a consequence, an 8 percent equity return is still to be preferred to a 3 percent or 4 percent fixed-income return. You might--- repeat might--- reduce your allocation to equities a bit. You wouldn’t leave them altogether.

The hard part for retirees is this: If your total portfolio return is lower, your withdrawal rate must also be lower.

Q. We have a financial adviser from our bank who is trying to sell us on something called "unit investment trusts"(e.g., Claymore Strategic Income Portfolio plus, series 8) and annuities (something called AXA Equitable) for our IRAs. I am always wary of something that is not a mutual fund for retirement purposes. I am wondering if this is something that a sales commission is paid on, and maybe that is why it is being offered. ---D.A., by email

A. Your intuition is working just fine. Your advisor is a salesperson who is trying to maximize his YTB. That’s Yield-To-Broker, as distinct from Yield-to-YOU. The AXA Equitable product is insurance-based and likely has a hefty commission. More to the point, you already have tax deferral with your IRA; you don’t need to put a tax-deferral vehicle inside your IRA.

Unit investment trusts are more complicated. They generally have a high front-end underwriting cost--- higher, for instance, than the brokerage commission you would pay to buy a similar exchange-traded-fund (ETF). Claymore also offers ETFs. Many unit trusts also present other issues when you go to sell and discover that your broker is the only firm that makes a market, and there is a big spread between what you would pay to buy the security and what you will get if you sell it.

Commissions are NOT evil incarnate. As I’ve noted many times, there are brokers out there who make a good living putting people into good, low-expense-ratio mutual funds. It is also possible to have much higher expenses through a genuine no-load mutual fund than through a front-end load fund. Morningstar, for instance, lists some 12,253 true no-load funds. Of those, 10,755 have expense ratios higher than the 60-basis-point (six-tenths of 1 percent) expense ratio of the major American Funds funds sold by brokers.
The broker at your bank, however, doesn’t appear to have any of those products in his toolbox.