Scott Burns

by Scott Burns

SCOTT BURNS explains how today's complex economic issues affect our day-to-day lives in common, everyday language. Burns explains intricate financial subjects better than anyone else and your readers will be grateful for that.

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HOW TO INVEST WITHOUT CALAMITY

Q: My wife and I have recently inherited $400,000. The money is presently parked in a bank savings account. We are both retired and were financially secure even before this windfall. Could you suggest some long-term options for investing this money that are safe from the bewildering fluctuations of the stock market? -- R.L., by e-mail

A: Here are two suggestions. You can avoid market risk by buying a fixed-term annuity product. Basically, it's like a loan you give to an insurance company, and the company pays it back in a selected number of years. The longer the term you pick, the better the interest rate you will receive on your money.

You can get quotes from www.immediateannuities.com by inputting the amount you want to invest and looking for the monthly payment. Recently, for instance, an investment of $100,000 would have brought a monthly payment of $1,740 for five years, $970 for 10 years and $730 for 15 years. The implied yield on these payments is an annual rate of 1.7 percent for five years, 3.1 percent for 10 years or 3.7 percent for 15 years. A small portion of the payments would be taxable interest. The rest would be return of principal.

You would then have a reliable flow of cash that you can use to augment your spending, giving or investing.

Another option would be to donate a portion of the $400,000 each year to a charitable gift fund. You would have the benefit of an immediate deduction in the amount donated, reducing your income tax bill. While you have many choices, you could invest it very conservatively, looking for capital preservation, not growth. There are many of these funds, but Fidelity has the largest. It is very competitively priced. Furthermore, you'd be able to make donations from the fund each year. So you can either increase your charitable donations or use the charitable gift fund as a substitute for your giving from other income sources.

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Q: I am 60 years old, single and have no dependents and no debt. I rent the place I live in. All my money is invested in Vanguard mutual funds. Here is how the money is invested in a taxable account: $1 million in Tax Managed Capital Appreciation, $700,000 in Tax Managed Small Cap, $63,000 in Tax Managed Growth and Income, and $30,000 in Prime money market. An IRA account is invested this way: $190,000 in the Total International Stock Index, $260,000 in Growth Index and $12,000 in Value Index.

I lost my job more than a year ago. It is difficult to find another one. Can I retire on the money I have? How much pension can I safely tap from this capital per year? -- V.C., Dallas

A: You can retire provided only that you can afford to live on the income from your portfolio of $2,255,000. In the current market, a 4 percent withdrawal rate might not be wise. Instead, you should select a rate more in line with the actual dividend and interest income the portfolio can produce -- say, 3 percent. That would give you an income of about $68,000 a year. By investing a portion of the money now in mutual funds in "dividend aristocrats" -- stocks with a long history of growing dividends -- you might also consider living on as much as 4 percent of the portfolio. That could increase income to $91,000.

This income will be supplemented by your Social Security benefit, when you elect to take it. If you check your most recent annual statement from Social Security, you'll find estimates of what your benefit will be at age 62, your full retirement age, and age 70. That will definitely be a nice addition to your other income.

How this feels will depend entirely on how much you were earning when you were working and how comfortable you are living on that $68,000 a year.

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Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com. Please visit my Web site at www.scottburns.com to comment on any of my articles, find referenced Web links or to discuss personal finance topics on my forums. Questions of general interest will be answered in future columns and on the Web site.

Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.

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