Q. I am retired and 69 years old. I have an IRA account with Putnam, which I opened in May 1993. It has a current value of about $100,000.  The account consists of Class A shares in Putnam Voyager fund and another Putnam fund. The expenses of both funds are above average. The returns are below average.  I am considering moving the account to another IRA.

My plan is to take only the required annual distributions when necessary. Do you feel the Vanguard 500 Index fund is a good choice for the transfer? Can you recommend any other funds you feel would be better? Is it better to use a broker like Schwab, or go directly to Vanguard or Dodge and Cox?
---T.B., by email from Spring, TX

A. Moving is a good idea. Performance has been poor. Voyager fund, one of the big-time losers in the 2000-2003 crash, has been a consistently poor performer over the usual measuring periods in the last 10 years. In the 12 months ending May 31, for instance, it trailed the S&P 500 index by 7.46 percent. It also trailed 76 percent of its competition. You have to go to a 15 year investing period before its performance was in the top 50 percent (47 percent, to be precise). Even then it trailed the S&P 500 index by 1.72 percent a year--- for 15 years.

But you have another reason to change funds. You're taking too much risk. You're approaching the need to take Required Minimum Distributions, and you should change your investments accordingly.

The simple path is to buy shares in a balanced fund, preferably a low cost index portfolio of stocks and bonds. One candidate is Vanguard Balanced Index (ticker: VBINX), which is 60 percent total U.S. market and 40 percent total U.S. bond market. Its current yield, about 2.9 percent, will go a long way toward meeting your coming RMD requirement.

A better (but still simple) path would be to create your own balanced fund. Buy two separate funds, an equity index fund such as Vanguard Total Stock Index (ticker: VTSMX), which duplicates the entire U.S. market, and a bond fund such as Vanguard Inflation Protected Securities (ticker: VIPSX). Having two separate funds would allow you to draw money from the bond fund when equities were having a bad year. And draw from the equities fund when they were having a good year.
Since that's a basic Couch Potato portfolio, you could also diversify further by using my Couch Potato Building Blocks. This can be done at Vanguard without the commission costs for buying Vanguard funds through a Schwab account.

Q. I can't stand the thought of putting my retirement funds in the stock market. All I hear and read is that I will be sure to starve if I don't. However, what is wrong with me maxing out my 401k--- which would be approximately $15,000 a year--- and investing this sum in the U.S. Treasury securities that my Federal Employees TSP offers? These securities pay about 5% a year and there is no risk. I even get a 5% match on my contributions. The thought of an extended down market, just when I want to retire, is just too scary. Why not settle for a lower return and just save more money? What do you think?
---M. R., by email
 

A. You’re ahead of the crowd.  Events regularly prove that most people don’t truly understand risk until they experience a large loss. Many people, for instance, were wildly overconfident in the late ‘90s as the stock market soared year after year. They went into retirement early, with lots of money, and then got clobbered by the 2000-2002 crash. The losses permanently reduced their standard of living.

Others get talked into taking risk because it’s the only way they can hope to have the income they want in retirement. Rather than set more modest spending goals, they ask their money to work harder. The investment business encourages this kind of thinking because the fees are higher.

You, however, could max out your 401(k) and invest in Treasurys as you suggest. The one flaw in your approach is that even Treasurys have risk--- interest rate risk. You can overcome that when you retire by establishing an IRA rollover brokerage account and buying a series of TIPS (individual Treasury Inflation Protected Securities) with different maturities. Then you would enjoy a safe, inflation protected return of nearly 3 percent.

On the web:

Fund information at Morningstar

The Couch Potato Portfolio Building Blocks