Share story

Investing

Q: I am 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 now. Does it make sense to look at a fixed-index annuity that would increase in value based on the investments I choose?

A: 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 tax-deferred 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 that the annual fees appear to be 3.6 percent. That’s nearly twice the current yield on a balanced portfolio.

Q: I am a 68-year-old widow, still working part time at my old job. Recently, my Edward Jones agent quit, so I decided to move my IRA to Fidelity, where my 401(k) is. Everything transferred as is, except for an annuity, which is now in cash.

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?

A: Edward Jones favors American and Lord Abbott funds because it is a traditional retail brokerage firm, selling front-end 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. And each firm can make proud claims of superior performance for some of its funds, some of the time.

A more compelling issue for you is whether you can find a fund that will be superior to either the American Funds fund you hold or the Fidelity fund that is 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 suggestions inside the Fidelity camp than what they have suggested.

You could also consider moving to Admiral shares of Vanguard Balanced Index, Vanguard Wellesley or Vanguard Wellington. This would reduce expenses further while retaining the higher performance rating.

Questions: scott@scottburns.com

Copyright, 2013,

Universal Press Syndicate