Retirement about more than income
Health care plan ruling, ‘fiscal cliff’ wrangling and Facebook’s IPO setback also rank high.
Iam
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