I am going to retire in 2009. The financial adviser for my company has told me that he doesn’t like index funds for retirement. He says they are fine in the accumulation phase but not good in the distribution years because of volatility. My index funds - Vanguard 500, Total International, Total Bond, and Total Stock indexes - have all performed well in the past. I have other securities in my portfolio as well. What do you think? Is there a better alternative to index funds in retirement? - M.A., by e-mail
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Ask your adviser for the source of his research. You might also ask him if he can spell bogus. Index funds have the volatility of the asset class they represent. Managed funds may have more, or less, volatility than their asset class, depending on the manager’s luck/skill. But managed funds are not a reliable route to reduced risk.
The best way to reduce risk, whether you use managed or index funds, is to diversify across multiple asset classes. This is what you have been doing, while reducing the cost of investing.
You can reduce the overall risk of your retirement portfolio further in several ways. The easiest is to shorten the average maturity of the fixed-income fund in your portfolio. An extreme case would be to replace your total bond market fund with a money market fund. You can also add other asset classes, such as real estate investment trusts. And, finally, you can convert a portion of your portfolio to a lifetime annuity. This will increase your immediate cash flow at the expense of your eventual estate - but it will increase the odds that your remaining invested assets will survive a long period of withdrawals.
The source of the research that supports these suggestions is Ibbotson Associates, now owned by Morningstar.
My wife and I, both 65, are very close to retiring. Between us, we have over $200,000 in 401(k) accounts in three different employers’ plans. What is the best way to for us to handle these funds without losing a great deal to taxation? Additionally, I would like to use some of the money for remodeling our mortgage-free home. - T.M., Austin, Texas
Unless you are unusually fortunate and have very low-cost 401(k) plans, your first step should be to consolidate your plans so that each of you has a single IRA rollover account on a low-cost investing platform such as Vanguard, Schwab, or Fidelity.
At Vanguard you will be able to choose between low-cost index mutual funds and low-cost exchange-traded fund versions of the same index funds. At Schwab or Fidelity, you’ll need to use a combination of their index funds and ETFs to build a well-diversified but low-cost portfolio.
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