MANY PEOPLE believe mutual funds can be fine investments, but they hate to pay taxes on capital gains these funds dispense each year. Funds stick even "buy-and-hold" investors with a tax bill.
And mutual funds often realize capital gains early in the year. Later in the year, the fund's investments in a bad market can take a big hit -- an unrealized loss -- but unrealized losses don't offset realized capital gains.
There's a way to avoid tax problems and still enjoy mutual fund advantages -- through single-premium variable annuities, which you buy from a stockbroker or an insurance company.
Variable annuities allow you to allocate money among mutual funds, and no income tax is due until you take your money from the policy. And, unlike with a 401(k), 403(b) or an IRA, you need not begin to withdraw money when you reach age 70 1/2 .
You may leave assets in your annuity until the policy expires, then roll it over -- still tax-deferred -- into another annuity. You may also switch among funds without paying taxes.
In a tax-deferred annuity, your money grows much faster than in a taxable account. By deferring taxes, your principal earns interest, your interest earns interest and the money you would have paid in taxes earns interest -- all tax-free until withdrawal.
As you near retirement, it's generally a mistake to become much more conservative. Most people who retire today at age 65 will live at least another decade or two. And even with inflation running at a modest 3 percent, someone whose annual living expenses are $60,000 today would see those costs grow to almost $80,000 in 10 years and about $100,000 in 20 years.
"A portfolio of 100 percent bonds can't grow enough in two decades to provide sufficient income," says Jonathan Pond in "Four Easy Steps To Successful Investing." "People must keep at least 60 percent of their investments in stocks or stock funds when they reach retirement."
If you're looking ahead to retirement, heed this warning from Michael Korda in "Do These Things Before You Are Forty," in Success magazine: "Before 40, start putting away 'I quit' money. Nothing is more depressing than absolute dependency -- the knowledge you can't afford to walk out on your job. By the time you hit your 40th birthday, put enough away so you have money to live on for a year or two."
Some other notes:
"Good news for people who buy U.S. savings bonds each year. A new formula boosts the payout on Series EE bonds by at least a full percentage point." (Money, June.)
"The Court of Appeals has upheld a $4.1 million surcharge against a Rochester, N.Y., bank for not diversifying stock holdings, a violation of the 'prudent person rule' for fiduciaries." (Moneypaper, May.)
Pub Date: 5/21/97