Tony Bell of Bell & Co. Private Wealth Management in Sacramento, Calif., answers readers’ investing questions.
Q: I am 69 and have $400,000 to set up a retirement plan for a monthly income of about $1,500. What bond funds, mutual funds and ETFs would be good?
A: Creating income during retirement can be challenging and time-consuming. Generally speaking, the ideal retirement portfolio has a combination of bonds, which provide predictable fixed income; equities, which provide appreciation potential and dividend payments; alternatives, meaning real estate, commodities, etc., that hedge inflation; and cash, the safest option.
Before determining which fit best in a retiree’s portfolio, the investor should first assess his/her risk tolerance in order to determine the proper allocation among bonds, stocks, alternatives and cash. In addition, the allocation should consider the current economic cycle, political climate, market performance and inflationary trends.
Another challenge when creating retirement income from your “nest egg” involves income consistency. For example, typical bonds make interest payments semiannually. This leaves the retiree with no income for 10 months a year and requires budgeting.
One way around this is to create a “bond ladder,” which is a portfolio of fixed-income securities where each security has a significantly different maturity date.
The benefits of this type of investment structure are twofold. Not only is the investor afforded income “smoothing,” but by purchasing several smaller bonds with different maturity dates (rather than one large bond with a single maturity date), the investor minimizes interest-rate risk and increases liquidity.
The goal is to position your investment portfolio so that it generates responsible income, preserves principal and maintains risk equilibrium. Investors should either utilize the advice of a professional or spend time educating themselves.
Annette Thau wrote a fantastic book, “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds and More.” As the title suggests, it’s a great resource for most investors.
Q: We recently changed financial advisers and are now putting away money for our grandkids in a different 529 college savings plan. Our previous fund’s quarterly statements never listed any investment costs. With our new financial adviser’s recommendation, we are investing in the Franklin Templeton 529 College Savings Plan and pay 3.5 percent each time we invest. We recently looked at California’s 529 plan, ScholarShare. The most that any of the ScholarShare plans charge is an annual 0.61 percent; most charge 0.3 percent or less. Is our 3.5 percent a reasonable fee for each monthly investment?
A: There are typically two ways of investing in a 529 college savings plan: direct-sold 529 plans, which is a do-it-yourself way of investing, and institution/broker-sold plans.
The direct-sold plans, like those in California and most other states, allow for much lower management fees and are free of broker-originated sales charges, often called loads. You are solely responsible for fund selection.
When investing through your broker or financial institution, the adviser analyzes your investing time frame, risk tolerance and other needs, then makes appropriate choices for your situation.
From a cost standpoint, the 3.5 percent fee you reference is the sales load you pay each time you buy units of the chosen funds. Paying a sales load for each contribution may greatly reduce the growth potential of your account.
There is little doubt the cheapest way of investing in a 529 plan is California’s ScholarShare program, which is managed by TIAA-CREF. Just be aware that cheaper is not always better, especially if you want guidance from a financial adviser.
Ask your adviser for a detailed college planning analysis of the least expensive/most effective options. These should include a 529 plan, a Coverdell Education Savings Account and qualifying U.S. savings bonds.
Claudia Buck writes for The Sacramento Bee.
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