Re­tire­ment about more than in­come

Health care plan rul­ing, ‘fis­cal cliff’ wran­gling and Face­book’s IPO set­back also rank high.

Austin American-Statesman - - BUSINESS -


re­tired, draw­ing So­cial Se­cu­rity and a pen­sion, with a few other in­vest­ments and tax-de­ferred ac­counts. I will soon need to start tak­ing re­quired min­i­mum dis­tri­bu­tions. I have a 401(k) worth just over $225,000. I am earn­ing about 2 per­cent an­nu­ally on this money. Does it make sense to look at a fixed-in­dex an­nu­ity that would in­crease in value based on the in­vest­ments I choose? It ap­pears that fees would be about 3.6 per­cent a year. — R.R., by email

There is a strate­gic rea­son not to do this, and also a prac­ti­cal rea­son. The strate­gic rea­son is that you al­ready have much of what the in­surance prod­uct of­fers — a re­li­able in­come. You have So­cial Se­cu­rity and a pen­sion. The likely with­drawal rate you can have by putting your $225,000 taxde­ferred re­tire­ment ac­count into an an­nu­ity prod­uct is about 5 per­cent, or $11,250 a year.

Now com­pare that to the to­tal of your So­cial Se­cu­rity and pen­sion ben­e­fits. Since you al­ready have a good deal of guar­an­teed in­come, what you need in ad­di­tion is flex­i­bil­ity and a fund to deal with emer­gen­cies. That’s what you have in your cur­rent tax-de­ferred ac­count. There is no rea­son to give it up.

The prac­ti­cal rea­son for avoid­ing this in­vest­ment is that it is a com­pli­cated prod­uct built with smoke and mir­rors. The only thing you know for cer­tain is the an­nual fees ap­pear to be 3.6 per­cent. That’s nearly twice the cur­rent yield on a balanced port­fo­lio. That means the in­surance com­pany is tak­ing ev­ery bit of the in­come on your money and a nice slug of prin­ci­pal, ev­ery year, in ex­change for of­fer­ing you the siz­zle of pos­si­ble, but un­likely, in­come gains.

You also need to un­der­stand that what you call “in­come” is likely to be the prin­ci­pal of your in­vest­ment. So once you start tak­ing with­drawals, the con­tract will no longer be worth your orig­i­nal in­vest­ment. Bot­tom line: This is not a good choice.

I am a 68-year-old widow, work­ing part-time. Re­cently, my Ed­ward Jones agent quit, so I de­cided to move my IRA to Fi­delity, where my 401(k) is. My 401(k) is in Fi­delity Free­dom 2010. Ed­ward Jones fa­vors Amer­i­can and Lord Ab­bott funds. Fi­delity wants me to de­cide if I want to change any­thing. Do you have any sug­ges­tions? — I.P., by email

Ed­ward Jones fa­vors Amer­i­can and Lord Ab­bott funds be­cause it is a tra­di­tional re­tail bro­ker­age firm, sell­ing fron­tend load funds that pro­vide a com­mis­sion to the bro­ker. As a prac­ti­cal mat­ter, once the com­mis­sions are paid, the an­nual costs of most Amer­i­can funds are in the same ball­park, or less ex­pen­sive, than com­pa­ra­ble Fi­delity funds.

Fi­delity Free­dom 2010 fund is a con­ser­va­tive al­lo­ca­tion fund with less than 50 per­cent of its as­sets in eq­ui­ties. It rates only three stars (av­er­age) from Morn­ingstar and has an ex­pense ra­tio of 0.59 per­cent. Amer­i­can Funds In­come Fund of Amer­ica A shares has the same rat­ing from Morn­ingstar and the same ex­pense ra­tio, 0.59 per­cent. The largest and most im­me­di­ate dif­fer­ence if you make the change is that Fi­delity will be col­lect­ing the man­age­ment fees, not Amer­i­can Funds.

A more com­pelling is­sue is whether you can find a fund that will be su­pe­rior to ei­ther the Amer­i­can Funds fund you hold or the Fi­delity fund be­ing sug­gested. Fi­delity Pu­ri­tan (ticker FPURX) has a four-star rat­ing from Morn­ingstar. It also has an ex­pense ra­tio of 0.59 per­cent. So there are bet­ter op­tions in­side the Fi­delity camp than what they have sug­gested.

Many had hope 2012 would be the year the global econ­omy fi­nally re­gained its vigor. It didn’t hap­pen.

The three largest economies — the United States, China and Ja­pan — strug­gled again in 2012. The 17 coun­tries that use the euro en­dured a third painful year in their fi­nan­cial cri­sis and slid into re­ces­sion.

The slow global eco­nomic re­cov­ery was cho­sen as the top busi­ness story of the year by busi­ness edi­tors at the As­so­ci­ated Press. The U.S. pres­i­den­tial elec­tion came in sec­ond.

1. Global econ­omy: World­wide growth was slack again in 2012. The global econ­omy grew just 3.3 per­cent, the In­ter­na­tional Mon­e­tary Fund es­ti­mates. The U.S. econ­omy, the world’s largest, grew only 2 per­cent. Un­em­ploy­ment re­mained a high 7.7 per­cent. Europe fared worse, as the euro al­liance sank into re­ces­sion.

2. Pres­i­den­tial elec­tion: Pres­i­dent Barack Obama won re-elec­tion over Mitt Rom­ney, who had staked his bid on the weak­est U.S. eco­nomic re­bound since the Great De­pres­sion and had pledged to slash taxes. Un­em­ploy­ment un­der Obama topped 8 per­cent for 43 straight months.

3. Health care plan up­held: The Supreme Court caught many by sur­prise when it up­held the Obama ad­min­is­tra­tion’s health care re­form in a 5-4 vote. The law re­quires Amer­i­cans to buy in­surance or pay a tax, while sub­si­diz­ing the needy. Med­i­cal de­vice mak­ers, though, will face a new sales tax. And some small busi­nesses say the law will dis­cour­age hir­ing be­cause it re­quires com­pa­nies to pro­vide health care once they em­ploy more than 50.

4. Fis­cal cliff: A dreaded package of tax in­creases and deep spend­ing cuts to domestic and de­fense pro­grams loomed over the econ­omy in the year’s fi­nal months. Ne­go­tia­tors strug­gled


Austin Mitchell (left) and Ryan Le­hto work on an oil der­rick out­side of Wil­lis­ton, N.D. The U.S. is on pace to pass Saudi Arabia as the world’s top oil pro­ducer within two years.

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