by Archie M. Richards, Jr., CFP^®
May 2, 2005

Harris writes, "I'm retiring at 66 with a fairly large estate. I talked with a CFP about setting up an investment program that supplies income for the rest of my life. He suggested putting $600,000 into a fixed annuity paying 4 or 5 percent a year, $400,000 in stocks, divided among various sectors, and $200,000 in a non-traded, low-leveraged real estate investment trust, paying 6 percent with no increase in share price. What do you think about these recommendations?"

I don't care for them, Harris. Hearing the word "income" from your lips, the planner recommended investments that satisfy that particular need. But he excluded the possibility of growth. The REIT pays 6 percent with no growth and can't even be sold! Neither can the annuity. Yikes!

At age 66, you should count on living for at least 34 years. You need growth as well as income.

An REIT that can't be traded is more difficult for a salesman to sell to customers than a regular REIT traded on an exchange. Therefore, the salesman and the people he works with probably receive a commission of 7 percent - much more than they'd receive from selling a regular REIT. Annuities also pay something like 7 percent to salesmen.

With $800,000 going into the non-tradable REIT and annuity, the planner and his associates would probably receive at least $56,000 right off - about the equivalent of one year of your income. This seems excessive to me.

I suggest investments in the following index mutual funds:

10%	Large-cap value stocks
10%	Large-cap growth stocks
5%	Small-cap value stocks
5%	Small-cap growth stocks
10%	European stocks
10%	Far Eastern stocks
10%	Emerging Market stocks
20%	REITs
20%	Long-term corporate bonds

Vanguard has index mutual funds for all these investment segments and charges no commissions at all. The operating and transaction costs are extremely low.

If a few of the funds perform especially well during the year, sell portions of them and add the proceeds to the funds that have been weak. Keep the values of the various funds roughly equivalent to the above percentages. But there's no need to engage in this rebalancing more often than once a year. Make it a year and a day, to avoid short-term capital gains.

If you don't want to rebalance the portfolio yourself, open a "wrap" account with a financial planner. The fellow only has to review the account once a year. The fee should be no more than 1 percent a year - preferably less.

Do not give discretionary power to the planner. Require that you approve every move in advance.

As to income, the investments I suggest pay about 3 percent per year. On $1.2 million, this comes to $36,000.

Not enough for you? Fine, withdraw 5 percent, or $60,000. You might even withdraw 7 percent at the beginning of your retirement, when you may want to travel to places you haven’t had time to see in the past. But after a few years, bring the income back to 4 or 5 percent. Whatever the level, withdraw the same percentage of income from each fund. Over the long run, the growth from this portfolio will far exceed these modest cash withdrawals.

But let's say you're dead set against withdrawing more income than the investments themselves supply. In this case, you must be willing to sacrifice some of the growth.

You might cut down on mutual funds of growth stocks, which pay little or no income, and buy Vanguard's Equity Income Fund, which pays 2.6 percent.

Another possibility is the Flaherty & Crumrine Preferred Income Fund - symbol PFD. This pays 6.4 percent and has modest growth potential as well. (In archierichards.com, see the column dated 5/3/04.)

Forget about high-priced "experts." Take charge of the investments yourself.