|
DebtFreeGuru.com's - Tip of the Week - Monday, April 28, 2003 |
|
|
If you can't read this newsletter or it's in any way garbled, just click the Reply button and type a brief note explaining that you can't read the newsletter. We'll get you one you can read right away! (Always feel free to forward) |
|
|
My Money Center "...a new thought company" If you or someone you know is struggling or unable to meet your obligations Contact Me for a FREE no obligation evaluation to see if one of the My Money Center Programs is right for you! Or Call 813-354-2563
Click here to order your credit report, credit monitoring service or Credit Scoring Analysis!
•
My
Personal Invitation |
Retirement:
Make your savings last
NEW
YORK (Money magazine) - A member of my family recently asked me for
financial advice. The
specifics of his situation are unique, but the basic problem is fairly
common: how to invest limited retirement savings and make the money last. Although
my relative earned a hefty income at some points during his life, he never
had access to a pension plan or a 401(k). After he retired, he was left
with his Social Security and relatively limited investments beyond the
equity in his home. He
finally sold his house, and after paying off the mortgage, he had about
$225,000 to invest. He first considered buying an annuity, but the returns
were too low. Then he asked if I could recommend a better alternative.
Here's what I wrote him. Dear
G.R., I'm
glad the sale of the house went well, and I'd be happy to help you explore
your investment options. Frankly, it's not surprising that the annuities
you investigated offered inadequate returns. The
real selling points of annuities are safety and predictability, not high
payouts. And you're going to have to stretch a little bit to reach the
targets you've set. You want to withdraw about $2,000 a month -- or
$24,000 a year -- from investments totaling around $225,000. That requires
a 10.7 percent annual return if you spend only interest, dividends and
capital gains but leave your principal completely untouched. Fortunately,
you can afford to spend a little principal -- 2 percent a year, say -- as
long as you don't run through it fast. Realistically, that means you need
to achieve an average annual return of 9 percent or so, which is doable
without taking huge risks. But
conservative income investments won't be enough to get you there. You'll
also need some stocks that offer long-term growth. The
backdrop of war and possible further terrorism makes the investment
outlook even more uncertain than usual. Still, the worst appears to be
over for the market. Low interest rates and massive government spending
should stimulate the economy. Trends
in both corporate revenue and earnings are slowly improving, despite
scattered disappointments. Most important, high-quality stocks are no
longer wildly overpriced. From today's levels, stocks should be long-term
winners, even if they perform badly in a given quarter. You've
already told me that you are comfortable putting at least half of your
money in stocks, even if those investments are volatile. But be sure you
are willing to ride out short-term setbacks. Would
you really be okay if some of your investments dropped by 30 percent and
needed more than a year to recover? The investments I suggest should be
comparable to or less volatile than the overall market, but even
conservative choices can decline in value. Before
I get to specific investment picks, let me walk through the logic. The
Concept It's
possible to achieve financial goals by choosing a single investment or a
small group of similar investments. But history shows that you can attain
higher returns with lower risk through a strategy known as asset
allocation. This consists of dividing money among a variety of different
investments that collectively provide the optimum mix of risk and return,
even though some of the choices may seem inappropriate when considered
individually. The
Means It
is most practical for you to rely on mutual funds. Buying individual
stocks and bonds takes more money than you have right now and also
requires active management and considerable record keeping for tax
purposes. Mutual funds, by contrast, provide diversification because they
generally own several dozen different investments. In addition, they
require relatively small minimum initial investments. They can provide
monthly distributions and do much of the record keeping for you. Minimizing
Risk The
plan I'm proposing has a number of characteristics that minimize risk. In
addition to diversifying among types of investments, it also spreads your
money among several financial institutions that are all large and well
regarded. In addition, the specific funds offer a favorable balance
between volatility and potential gains. There's a limit to how much return
you can reach for and still meet your requirement that risk be held to a
minimum. But at least half the funds in the package offer real growth
potential. The
Portfolio The
package rests on nine funds divided into three groups of three. Each group
balances the other two. You should plan to invest an equal amount --
$25,000 -- in each fund, although not necessarily all at once. All of the
funds discussed charge lower-than-average annual fees -- in several cases,
much lower. Here's a look at the specific picks, starting with the income
group because it's the safest. Income
Funds Keep
the first $25,000 in your bank's money-market fund. Such a fund is almost
completely safe, but its yield is very low, less than 2 percent. Right
there is the catch. Keeping your principal completely safe creates an even
greater risk -- that you will earn so much less than you need that your
money will run out. To protect your principal over the long term, it's
smarter to take the risk of some short-term volatility. You
can get higher yields on your income investments by adding a couple of
funds that hold bonds or other long-term debt issues. Although bond prices
can fall when interest rates rise, these declines are typically far
smaller than the potential losses on stocks. The American Century Ginnie
Mae fund holds securities based on government-guaranteed packages of
mortgages. Their chance of defaulting is lower than that of even blue-chip
corporate bonds. The fund's current yield is 3.7 percent, and over the
long term it has returned an annualized 6.5 percent. To
get a still higher pay out, you can invest in bonds from companies with
less-than-perfect credit. The Vanguard High-Yield Corporate Bond fund
holds issues rated below investment grade. Technically, bonds with ratings
below BBB are considered "junk." But there's a world of
difference between those that are just slightly sub par -- the issues that
Vanguard High-Yield favors -- and truly distressed junk bonds that count
as toxic waste. Vanguard High-Yield's risk is comparable to that of a
conservative stock fund. The fund's current yield is 8 percent; its
long-term rate of return is 6.4 percent. (The fund charges a 1 percent
withdrawal penalty on assets held less than one year, but its rock-bottom
expenses more than offset that.) The
average current yield for this group -- the two bond funds and the money
fund -- is just about 4 percent; with an economic recovery, gains on the
high-yield corporates might push that close to 6 percent. Obviously, if
you want to withdraw 10.7 percent of your account each year, you need to
earn a higher return than 6 percent. At that rate, you would run through
your money in 15 years. With an 8 percent average return, you're good for
almost 19 years. And with a 9 percent return, more than 22 years, which is
where you want to be. So how do we get that extra return? Equity
Funds If
you keep part of your money in income investments returning an average of
6 percent over the long term, you can reach the 9 percent level you need
by finding other funds that achieve double-digit rates of return. Is that
goal realistic? Well, over the long term, large-cap stocks have returned
an average of 11 to 12 percent a year. (That counts both dividends and
price gains.) The
most straightforward way to capture a slice of the market is the Vanguard
500 Index fund, which tries to match the performance of the S&P 500.
Because the fund's manager makes almost no investment decisions and does
no stock research, the fund's expenses are incredibly low -- about a
quarter of the normal level. Since expenses come right out of your return,
Vanguard's low cost gives it an advantage. The fund has earned an
annualized 8.6 percent over the past 10 years. The
T. Rowe Price Equity Income fund holds more conservative stocks than the
S&P 500 and focuses on shares that pay above-average dividends. The
fund is actually less volatile than the overall market and its 9.9 percent
annualized return over the past decade has bested the S&P 500, in part
because the past few years have been so hard on the growth stocks that
this fund avoids. At
the other end of the risk spectrum is Fidelity Mid-Cap Stock, which buys
medium-size companies that have above-average growth potential. This fund
has taken a big hit recently -- it's down more than 27 percent over the
past year. But I think that just means midcap growth stocks are a bargain
right now. If I'm right, the fund's long-term return could top 11 or 12
percent. Hedge
Funds So
far, we've used up six of your nine funds. For the remaining three, you
want funds that offer protection against unpredictable market shocks. But
they'll still need to earn an average long-term return of around 9
percent. So we're sticking with stocks but looking at sectors that often
perform differently than the rest of the market. The
T. Rowe Price New Era fund was devised specifically to protect against
unexpected inflation. It holds chiefly shares of natural resources
companies, such as oil and mining, and its long-term historical rate of
return is 8.5 percent. Vanguard Energy is more specifically focused on oil
and gas stocks. Together with the New Era fund, it should protect you
against an upsurge in oil prices. This fund is more volatile than some but
has returned an impressive 10.5 percent a year on average. The
Fidelity Real Estate Investment fund is also an inflation hedge. The fund
doesn't own real estate directly; it buys real estate investment trusts (REITs),
investment companies that own equity stakes in properties and sometimes
also invest in mortgages. In this tough bear market, the fund has gained 2
percent over the past 12 months, and it boasts a 10-year rate of return
above 9 percent. All
together, these nine investments can come close to the 9 percent average
annual return you need. At that rate, you would still be slowly eating
through your capital -- unless a rebound in share prices greatly boosts
the value of your portfolio. Nonetheless, you should be safe setting up an
automatic withdrawal of $250 a month from each fund (excluding the money
fund, which is a reserve for emergencies). That works out to the $2,000 a
month you wanted. You're
probably anxious to get all your money invested as quickly as possible.
But there's no rush. You might want to put the full $25,000 into each of
your income choices and also make initial investments -- $10,000, say --
in each of the other funds. But I'd hold back the rest of the money until
the Iraq conflict has been resolved. After
that, do as little as possible -- you probably won't need to make changes
more often than once a quarter. Consider moving money out of a fund that
has a big run. If the midcap stock fund shoots up from $25,000 to $35,000,
for instance, you might shift $5,000 to a bond fund. If
any fund drops significantly, you should top it up by moving in some money
from your most successful funds. That way, you'll be sure to have enough
in each fund to sustain a $250 monthly withdrawal. And you'll always be
selling high to buy low. If
the stock market enjoys a strong recovery, your retirement savings might
grow to the point where it can provide the income you need practically
forever. That's worth hoping for, anyway. All the best, Michael. |
|
DebtFreeGuru.com - Tip of the Week - Monday, April 28, 2003 • PO Box 3782 • Clearwater Beach, FL • 33767 • Voice/Fax: 813-354-2563 • Copyright 2003 DebtFreeGuru.com All Rights Reserved. |
|
|
Please
Forward this to Everyone You Care About! It's
Your Money – Keep More of It! DebtFREEGuru.Com
is proud to offer: Conscious Prosperity: The
Secret to Simple and Lasting Personal Wealth By
John Moore - $49.95 - 312 Information Packed Pages! A part of all proceeds is donated to the Ministerial Endowment Fund created to provide financial assistance to ministerial students while in school! Generous Bookseller Discounts for Bookstores! We've partnered with PayPal to facilitate you ordering online! FREE Shipping! - !Order Now! It's
Your Money – Keep More of It! |
|
|
Here's What People Are Saying About Conscious
Prosperity: "Your practical approach to debt resolution has made a difference in my life and in the lives of several members of this congregation. If anyone wants to know how to apply spiritual principles to become debt-free, I'll be glad to send them your way." - Rev. Thomas W. Shepherd, Sr. Minister, Sunrise Unity Church, Citrus Heights, California and author of Glimpses of Truth "People
in our congregation are using John Moore's program to literally change
their lives. His workshop attracted a large crowd and prompted calls to
"bring back that 'debt-free guy!"" "Thanks, John! Your workshop was the best of any kind we've attended
in 36 years of marriage. You
gave us a step-by-step way to manage our money, and now we're debt-free
and watching our savings grow."
"We did not have to cut way back to succeed. The only thing that we had to do was stop spending on credit. We have gone from 12 debts to 4, soon to be 3. We are looking forward to NO DEBTS! Amazing program. Simple and doable!" – Holly and Mark G., Dietitian and Registered Nurse, Tallahassee, Florida |
|
The Author John S. Moore has been facilitating financial planning, cash management, investment and personal growth workshops throughout the United States for more than twenty years.
In hundreds of workshops over the past 10 years, John has taught thousands of people how to live a debt-free, stress-free lifestyle. He teaches primarily at Unity, Religious Science and Science of Mind churches, as well as other churches, schools and corporations around the United States. |
|
Copyright © 2003 John Moore • PO Box 3782 • Clearwater Beach, FL • 33767 • Voice/Fax: 813-354-2563 • |