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THE ANSWER DESK . . . ARCHIVES
Volume 165: To submit a question to
MFI's panel of experts, please write to us.
This week's panel:
 Greg
Hilton
Gregory Hilton, J.D., LLM (tax), CPA, CFP is a Fee-OnlyŽ financial
planner in Chicago. Although his services are comprehensive he
concentrates on the tax and investment issues of retirement and estate
planning. He is registered as an investment advisor and maintains
membership in NAPFA, ICFP, and several legal, tax and accounting
associations. Greg is a national instructor on tax and financial issues
for the National Association of Tax Practitioners and is authoring a book
on financial planning for the highly compensated to be published by
Commerce Clearing House. Greg can be reached at (312) 222-9647 or by
e-mailing gh-jdcpa@usa.net. |
 Paul
Pignone
Paul R. Pignone, CFP, CLU, ChFC, a
Financial Advisor and Principal at Boston Retirement Advisors, Inc., in
Salem, New Hampshire, has been involved in the financial industry since
1978. Paul specializes in retirement and estate planning, investment
management, and business and tax consulting. He has taught financial
planning and investments at high schools and colleges and has conducted
seminars in Retirement and Investment Planning at Digital, Honeywell, GTE,
and many other organizations. |
Questions and Responses
How is the year-to-date return calculated?
Could I get 20% interest through a mutual fund?
How should I handle money from my company buyout and 401(k)
rollover?
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How is the year-to-date return calculated?
from Joe
Q: Can you explain how the YTD return is calculated? I can never
correlate with this calculation. The method I use is: current NAV (net asset
value) - adjusted with distributions - minus the NAV value at start of the year
divided by the NAV value at start of year.
A: (Greg) It is difficult to
reconcile your year to date returns with information reported by the mutual fund
companies. I have inquired into this problem in the past and have been told by
fund managers that the problem stems from our not having enough information.
One reason given for the discrepancy is that year to date returns for a
mutual fund are stated after expenses. The expenses include fund management
fees, 12b-1 fees (if applicable), etc., all of which are a part of the fund's
expense ratio. These expenses are factored in even though they may not have been
withdrawn by the manager from the fund balance.
Could I get 20% interest through a mutual fund?
from Sarah
Q: I'm thinking of starting a mutual fund account with my boyfriend. I
was wondering what that average interest rate was. My boyfriend said that there
could be a 20% interest rate and if we start the
mutual fund at $2,500.00 and add $200.00 a month, with the interest we could
have a nice "nest egg" in several years. Is this true?
Also he said that even if we don't add the extra $200.00 a
month, with the interest rate, the $2,500 would double in five years. Is this
true? I understand that we can't take out the money, but is this a good idea? He
talked to a mutual fund expert and this is what he told him. He also told my
boyfriend that if we did this and kept it up without taking any money out, that
in about 15-20 years we would have about $2,000,000.00. Is this true?
A: (Greg) What you need to do is
talk to another "mutual fund expert" right away. Unfortunately, your
boyfriend talked to a "salesman", and an unethical one at that (if he
really said what your boyfriend says he said).
First of all, a mutual fund that pays interest (i.e. a money market fund)
will yield a maximum of 5 or 6%. Further, the 20% yield your salesman crows
about was earned by some mutual funds over the last few years, but only the ones
that invest in stocks. Any fund that invests in stocks is subject to the ups and
downs of the stock market. In other words, there is no guarantee. In any
one-year period, stocks are dicey.
Don't be discouraged from investing in a mutual fund, but be realistic. The
longer you have to hold the fund, the stronger the likelihood that you'll earn
compound annual returns in the area of 10 to 20% (but it is much closer to 10%
than 20%). Now if we put your $2,500 in a generic mutual fund (that earned the
historical stock market average) and added $200 per month for 20 years, your
investment plan would grow to $260,000. Nice, but a far cry from your salesman's
$2 mil.
p.s. - Why can't you take your money out? I'll bet it was
because you were being sold an annuity, which makes it all the sweeter for the
salesman.
How should I handle money from my company buyout and 401(k)
rollover?
from Les
Q: I have a question about my company buyout and
401(k) roll over. I am going to take a buyout after 34 years at my company, in
the amount of $240,000. I have that same amount in my 401(k).
What I would like to do is generate around $2,500.00 a
month income after taxes, I have talked to four different planners: Some say a
variable annuity is the way to go, but I am concerned about the cost of that.
Another planner says to look to a mix of the top 20 or 30 blue chips and bonds.
He charges 1%, which seems reasonable. He does not sell mutual funds, but his
customers have all beaten the S&P 500 over a ten year span.
In short, I am confused which direction to go, and I am
only 53 so I would have to do a 72(t) plan for the distribution of funds
A: (Paul) Congratulations, Les.
You're in a terrific position to secure your financial future so I would
continue to be cautious. A few observations before I make any recommendations:
You require $2,500 per month or over 6% net of your total assets. At age 53,
you make no mention whether you plan to work again. With a life expectancy of
almost 25 years, if there are no other available assets, I would say you are
expecting your assets to perform greater than historical
returns (including an Inflation factor). It will be 9 years before you're
eligible for Social Security, and are you adequately covered for medical
insurance.
My recommendation to you is to find a Certified Financial
Planner and develop your retirement plan by considering all of the factors
mentioned above. By projecting return on assets, future expenses, considering
some inflation factor, and any other factors affecting your future, you will be
better prepared to achieve your objectives.
Then find an investment advisor that you're comfortable with and can trust
and allocate those assets according to your financial plan. As to your specific
question, annuities are too restrictive and don't provide adequate payout rates,
and the planner who selects the top blue chips and balances it with bonds, seems
to be your best bet. However, depending on his equity/bonds mix, I don't believe
that combination beats the S&P 500. Check it out and have them prove it.
Good luck!
Important Disclaimer
Investing in equities involves a serious
principal risk, and no assurance can be given that the techniques described here
will be successful. Returns vary and you may have a gain or loss when you sell
your shares. Past performance is no guarantee of future results. Index returns
shown are historical and include the change in share price, reinvestment of
dividends, and capital gains. Indexes are unmanaged and do not reflect the
impact of transaction costs. Transaction costs would have reduced the total
returns.
International investments, especially those in
emerging markets, entail greater risks (as well as greater potential rewards)
than U.S. investing. These risks include political and economic uncertainties of
foreign countries, as well as the risk of currency fluctuations. These risks are
magnified in countries with emerging markets, since these countries may have
relatively unstable governments and less-established markets and economies.
Lastly, the questions and responses set forth
here are for general informational purposes only and are not intended to
substitute for performing your own independent research or contacting your
financial or legal professional before making any investment decisions. We make
no guarantees as to the performance of any investment strategy you choose and
are not responsible for any losses you might incur.
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