Dear Mr. Berko:

I’m retiring this year and have $635,000 in a 401(k) account. My wife and I will get about $22,000 annually in Social Security payments. We have almost zero savings, Individual Retirement Accounts worth $8,000, our home has no mortgage and I figure we need about $65,000 a year to retire, which is just the amount of money I make now.

My company has suggested a joint and survivor immediate annuity for this money, which would pay us $35,000 a year for life. Add my Social Security to this number and we’re on the wrong side of the eight ball. Several of my buddies here will be retiring soon and are in the same boat. A few thousand dollars and a few years short. What would you do for me if I were a member of your family?

H.E., Moline, Ill.

Dear H.E.:

If you were a member of my family, I doubt that I would be giving you financial advice. My little sister Suzy is employed by an enormously large public corporation, and in the past 25 years she has accumulated a smidgen less than $500,000 in her 401(k). Suzy will hang up her tools this year when she turns 65, so she sought advice from her corporation and from a stockbroker, Bob, whom she has been dating for 16 years.

The corporation people wanted Suzy to convert her $500,000 401(k) into an immediate annuity (IA) that would pay her $20,167 every year until she’s 90. At that point, all payments would cease and the $500,000 would disappear into the corporate ethers. Well, her corporation must employ thousands of people with room-temperature IQs, because many of them select that option.

Meanwhile, broker Bob made three recommendations for Suzy:

1. $150,000 in a preferred stock unit trust with a 6.5 percent yield;

2. $150,000 in a U.S. government bond fund yielding 6 percent;

3. $200,000 in an IA that would pay Suzy $11,000 a year for her lifetime, and when she passes away it becomes worthless.

Broker Bob’s three recommendations would pay Suzy $29,750 a year, or just a smidgen under 6 percent. In the process, Broker Bob would make a nifty commission of almost $21,000.

Blood is thicker than water, but relatives are thicker than wood. That’s why I don’t lend money to family or give them financial advice. Believe me when I tell you that relatives are, without question, the worst people in the world with whom to be related.

However, in my opinion, Suzy’s corporate advice seems to be offered with criminal intent and her corporation may find itself the subject of a RICO (Racketeer Influenced and Corrupt Organizations) lawsuit. And the sterile, jejune, infantile and hugely expensive advice from Broker Bob confirms my opinion of most stockbrokers. Because I don’t want Suzy to become a miscreant on my doorstep, I felt compelled to offer a third alternative. Here’s how her money will be invested:

1. $200,000 in a variable annuity (she will have the same sub-accounts that I have in my VA) that will guarantee to pay Suzy a minimum of 6 percent a year until she’s 85 if certain income or death benefits are elected. Twenty years from now, we reckon the investment in the sub-accounts could be worth considerably more than her original investment.

2. Approximately $60,000 will be invested in short-term bonds such as Time Warner and Goodyear with yields to maturity in excess of 9 percent.

3. Approximately $60,000 will be invested in publicly traded business development companies, such as American Capital Strategies and MGC Capital, with current dividends yielding over 9.2 percent.

4. About $60,000 will be invested in various preferred issues such as General Motors Acceptance Corp. and Semco Capital, yielding an average of 9.9 percent.

5. Another $60,000 will be invested in a basket of closed-end funds (Liberty All Star, TCW Convertible Securities) with an average 8.3 percent yield.

6. And $60,000 will be invested in a handful of master limited partnerships such as Ferrell Gas and Terra Nitrogen, which have yields of about 10 percent.

This portfolio gives Suzy $40,000 in income with expected small dividend increases each year and modest growth potential. Her portfolio will earn 8 percent the first year. But unlike many retirement portfolios, which are parked in neutral and loaded with barren, gainless and unimaginative fixed-income issues, this portfolio requires hands-on vigilance. This portfolio is a living, breathing entity that must have occasional bubble baths and then be puff-dried. Unlike most retirement portfolios in which the retiree must reduce spending and eliminate various comfort items from their budget, Suzy’s portfolio should allow her to increase her spending during her retirement years.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service