Charting Your Course

How to translate last year's market lessons into this year's profits

states that retirees should shift toward income-producing funds, yet that’s not always the best strategy, especially for those who retire early. “I retir
ed from my job as a municipal employee when I was only 51,” says Willie Williams, 56, of Lynwood, California. “Yes, I wanted safety and income, but I also wanted growth, because I expect to need that income over many years. Therefore, when I rolled my retirement plan into an IRA, I invested more heavily in stock funds, including those offered by American and Putnam.”

Willie Williams had another concern too: he needed to tap his retirement plan for income but he didn’t want to pay a 10% penalty for withdrawing the money before age 591/2. Thus, he turned to his financial planner, Andrew Burleigh of Gardena, California-based Financial Network Investment Corp. (FNIC). Burleigh established a plan for Williams in accordance with IRS regulation 72(t), by which a person under 591/2 years of age can withdraw funds from a qualified plan-including IRAs-without incurring a penalty as long as the withdrawals occur for at least five years or until age 591/2, whichever is longer. “We brought in an actuary to sign off on the plan,” Burleigh says. “Withdrawals have to continue for at least five years, or until age 591/2, whichever comes later.”

Among mutual funds, Burleigh says even retirees should consider stock funds rather than bond funds, depending on their needs. “Retirees can expect to live for many years, and living costs will increase over those years. Stock funds are more likely than bond funds to generate the necessary returns.”

Among stock funds, Burleigh prefers diversified domestic funds to foreign funds or funds that specialize in particular sectors. “I often recommend American funds to my clients, and that includes retirees such as Willie Williams. Some American funds, such as American Mutual, Investment Co. of America and Washington Mutual, have outstanding records that go back 40 years or more.”
Burleigh is particularly impressed that American funds are all team-managed, some by as many as eight “portfolio counselors.” “That provides different investment perspectives and diversification within each fund. What’s more, if one manager leaves the company, the others are still in place, so the fund has continuity.”

The catch, at least for now, is that American funds generally follow the value style of investing that has been out of favor in recent years. For example, the $55 billion Washington Mutual Fund returned only 1.2% last year, far behind its outstanding 17% return over the past 15 years, while American Mutual Fund (over $10 billion in assets) showed a loss of -0.12% for the year. To remedy potential value downswings, “Putnam Funds make a good complement,” says Burleigh. “They tend to be a bit more aggressive, with a greater emphasis on growth funds, so they make good holdings when growth is favored over value.”

With so much emphasis on stock funds, as well as anxiety over interest rates, does anyone have a kind word for bond funds?
Many investors, of course, will prefer tax-exempt municipal bonds

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