Q: I retired from ExxonMobil in 2002 and opted for the fixed annuity instead of the lump sum. That decision has turned out to be a blessing...

Share story

Q: I retired from ExxonMobil in 2002 and opted for the fixed annuity instead of the lump sum. That decision has turned out to be a blessing in that I have avoided the constant decision-making and risks of managing the lump sum. My current income exceeds my living expenses. It will increase further when I am eligible for Social Security in four years.

My concern is my 401(k) plan, which is invested 100 percent in Exxon stock. It has gone up greatly in the past three years and may continue in the future — but anything can happen.

I don’t need the money, and there is no cost to administer the account. But it’s all in one stock. I am in the 15 percent bracket for federal income taxes.

I have no debt except my home mortgage of $195,000 on a home worth about $425,000. My monthly payment is $1,100, based on an interest rate of 5.38 percent. I have been thinking of taking a total distribution of the 401(k) in like kind with a portion designated as a net unrealized appreciation. I would sell the low-cost shares and pay off the mortgage. What are your thoughts?

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks.

A: Let’s look at this from another perspective. Your Exxon pension is secure but fixed. Inflation will reduce its purchasing power. But you also have a fixed-rate mortgage at an attractive interest rate. So why not consider $1,100 a month of your pension as a direct offset for your mortgage?

While you may want to invest your 401(k) plan differently, it doesn’t make sense to liquidate assets that can grow when you have a fixed income that can support your mortgage payments.

In your case, the net unrealized appreciation option with company stock in a 401(k) plan probably doesn’t amount to a massive tax saver.

Because you are in the 15 percent tax bracket, you won’t cut your tax rate with capital-gains savings.

Workers with higher incomes in higher tax brackets, however, should pay close attention to the net unrealized appreciation option for company stock in their 401(k) plans. By separating it from other 401(k) assets they can get beneficial tax treatment because only the cost basis for the shares will be taxed at ordinary income rates, while the accumulated capital gain will be taxed at low capital-gains tax rates.

Under no circumstances should anyone with substantial company stock in his 401(k) plan convert it, willy-nilly, into mutual funds. In your case, you should separate the shares and start diversifying into a broader portfolio over a period of time. (Full disclosure: I have been a shareholder in ExxonMobil and a number of other energy companies for several years.)

Q: What do you recommend for baby boomers who are being left with no health insurance when their job ends and they’re only 57 years old? It’s a long haul to 65!

A: Sadly, there are no miracle cures here. All you can do is take diligent action. Nongroup health-insurance rates are now so high that the premiums will absorb generous severance sums.

Worse, they are rising so rapidly, most people thinking about early retirement should abandon the idea. Here are steps to take:

• Use your 18 months of COBRA to maintain your group health insurance through your former employer while seeking another source of insurance.

• If you can, find another job with a company that provides health insurance.

• If you must take an individual health policy, look for one with a relatively large deductible.

This is the conventional wisdom. Another step is to become proactive about your personal health. While life deals some people some really bad hands — such as genetic predispositions to disease — evidence shows that about 80 percent of all our health-care expenses can be traced to poor decisions.

We can help ourselves and our society by taking personal health care seriously.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.