--D.R., by e-mail from New Mexico
A. Hancock funds aren't much to write home about, are they? Still, I wouldn't give up on the plan. Remember, it has the match. If you put in 3 percent of salary, your employer will double your money. Then John Hancock will work on taking some of it away.
But do the math. If you contribute $1,000 a year, your employer will match it up to 3 percent of wages. If you invest in A shares you'll pay the front-end load with your employers' contribution, reducing the expense ratio over B shares.
John Hancock Classic Value A shares, for instance, will get nicked for a 5 percent commission. That means every $1,000 you put up will be doubled by your employers contribution, less the commission. So your $1,000 will immediately become $1,900. Although well-rated funds are rare at John Hancock, this one carries a 5 star rating from Morningstar and an expense ratio of 1.25 percent. The expense ratio isn't great, but it isn't horrible, either.
So capture the match, buy A shares, and try to avoid the dogs in the Hancock kennel. Invest your other savings in good no-load funds with an IRA or Roth IRA.
Q. I have some questions about the recent advice that you gave K.K. of Houston. He has $545,000 and wants to retire at age 56. You advised him to set aside $65,000 to provide $10,000 a year until he begins to receive that amount from Social Security, and to take about 4 percent or $20,000 a year from the remaining $480,000, giving him an income of about $30,000, close to his current earned income after retirement savings.
You say simply, "...figure out how to use your savings. For a 56-year-old, taking a life annuity isn't a good choice."
Why isn't a life annuity a good choice? A life annuity would provide him about $30,000 a year instead of $20,000, with no risk of outliving it.
How should he invest his $480,000 so as to be able to withdraw 4 percent without a risk of depleting it? What happens to him if the stock market declines or stays flat for the next few years? Doesn't your advice violate the rule that one should not have anything in the stock market that will be needed within the next five to ten years?
-----D. H. Montgomery, TX
A. Life annuities are fine for people who are a good deal older than 56, but they aren't a good bet for people that young. Here's why: the life annuity will guaranty a lifetime income. It won't guarantee lifetime purchasing power. So you're really dealing with a tough choice: (1) you can buy a lifetime annuity and be quite certain that your lifetime purchasing power will decline or (2) you can invest your nest egg and take some risk that you will run out of money before you die.
Fortunately, there are steps you can take to reduce the risk of running out of money before you die. The first is to have a diversified portfolio containing both stocks and bonds. Research in portfolio survival has shown that an equity position of 50 to 75 percent works best. The same research indicates that your portfolio has about a 95 percent chance of long-term survival if you limit your inflation-adjusted annual withdrawal rate to about 4 percent.
You can learn more about this by visiting my website, www.scottburns.com, and visiting the sections on Couch Potato investing and Portfolio Survival.
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