A
revealing article appeared not long ago in a business website, titled “Invest
Your Cash for a Steady Flow.” Its author compared two routes by which retirees
might invest for a steady flow of income. The methods offered: an insurance
company annuity or a mutual fund’s payout fund. Both techniques are highly
promoted by their respective industries. Unfortunately, each presents notable
defects that a thoroughly competent financial analyst specializing in
retirement planning could clearly spell out.
The
annuity route doesn’t entice me. That industry specializes in high fees and burdensome
withdrawal penalties. In addition, the initial cost of the annuity is lost to
your forever. Furthermore, the payments you receive become worth relatively
less over time. In general, the annuity is not a device by which you’ll grow
old in comfort.
The
mutual-fund industry’s alternative, referred to as “managed payout” or “target
distribution” funds, introduces uncertainties of its own. Though the management
fees are less and what you invest doesn’t cease to be yours, there’s no
assurance of a predictable cash flow. If the fund managers guess wrong in their
investment decisions, you may find your income stream reduced to little or
nothing . . . with no recourse.
If
you now expect me to recommend a technique for a predictable annual return of
eight percent or greater, I must disappoint you. Though I generate this for
myself, it’s from an active and time-consuming business, not passive
investment. Most persons are neither inclined to nor capable of involvement of
this sort. Unfortunately you’ll earn little or nothing from bank savings
deposits, money market accounts or certificates of deposits. And by the way,
avoid like the plague promoters of programs that offer spectacular returns,
sometimes up to 30 percent per month. No good comes of that.
So
what do I suggest? Your best bet will
probably be a mixture of U.S. Treasury notes, short or intermediate-term high-grade
corporate bonds, and stocks which pay respectable dividends. Admittedly, you’ll not beat the world in this
way, but neither will the world beat you.
The advantages are that fees and costs are minimal, risk is slight, and
your cash flow is easily predictable.
And of equal importance, you need retain no financial advisor to
supervise your selections. It’s a simple
program you can learn to operate, with far less to go wrong than most
investment avenues you’ll be offered.
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If you enjoy this
weekly Straight Talk by Al Jacobs, you’re invited to check out my monthly
Financial Newsletter, as well as my new book, Roadway to Prosperity
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