Dear Mr. Berko:
My wife and I have read and kept every one of your columns since 1988, and we also send some to our kids. I never thought I’d have to write, but we need help and income right away. I am married, will be 67 next year and will retire this May with $315,000 in my individual retirement account. I also get $1,460 a month from Social Security, and my wife gets $700. Seven years ago, we figured we’d get at least 4 percent income from the certificates of deposit in my IRA, plus $800 a month in rent from our garage, which I was going to convert into a large two-bedroom mother-in-law apartment. But we can’t make it, because CD rates are 1 percent.
One of the guys I work with has a similar problem. A broker he knows tells him to put half the money from his IRA into 14 stocks (each paying more than 10 percent) and the other half into a variable annuity (also paying 10 percent). I’ve enclosed the names of the stocks (some of which I want to buy) and the variable annuity. Would you please give us your thoughts?
N.F., Waterloo, Iowa
I think your co-worker is getting dunked, skunked and skinned, and he is also getting patently unprofessional advice. The only annuities paying 10 percent are those issued by insurers in Balochistan, Bosnia, Bulgaria, Uganda and maybe Mongolia. I suspect that the salesman is telling your co-worker he can withdraw 10 percent of the annuity’s remaining/declining principal each year without triggering a penalty. However, this annuity has mortality and management and expense fees of 3.55 percent a year, and it’s quite likely that in 10 years or less, this variable annuity will be nearly worthless. Only five of those 14 super-yield speculative stocks are worth a peek. However, the salesman’s recommendation that your co-worker invest half his retirement account in those issues borders on attempted homicide. You guys must hire a knowledgeable, wise, experienced money manager whom you can trust.
Unfortunately, low rates are making folks such as you take extraordinary risks they’d never have considered a few years ago. On a risk scale of 1 to 10 (with 10 being the highest risk), each of the following recommended five issues has a risk factor of between 8 and 14.
Magyar Telekom (MYTAY-$6.28), yielding 14 percent, is a $2.9 billion-revenue company and the largest mobile communications company in Hungary. MYTAY trades at a 34 percent discount to its $9.50 book value. Purchase 400 shares.
Linn Energy LLC (LINE-$29.17), yielding 10.6 percent, is a $2 billion-revenue oil and gas exploration company that should produce excellent results in 2014. Buy 125 shares.
Natural Resource Partners LP (NRP-$19.56), yielding 11.2 percent, is a $344 million-revenue company that leases, owns and manages mineral properties, including 2.4 billion tons of coal reserves. Purchase 150 shares.
Rhino Resource Partners LP (RNO-$11.97), yielding 14.9 percent, is a $320 million-revenue company that produces, processes and markets steam and metallurgical coal. Buy 225 shares.
Annaly Capital Management Inc. (NLY-$10.67) is a highly leveraged mortgage real estate investment trust yielding 13.1 percent. Purchase 300 shares.
Those five issues will cost you about $15,000 and give you better than an 11 percent dividend yield. As you know, the issues are horribly speculative; however, a $3,000 investment in each represents less than 5 percent of your portfolio.
Now hire a money manager and have him select a couple dozen issues that meet your risk tolerances and goals. Failing that, make some selections from my past nine months’ columns.
You should remain employed for another five years, which will give your retirement account time to build and mature. Meanwhile, don’t interfere with your friend’s investment choices. It could cause some very strong resentment on his part.