Need advice



here is my situation:

Age: low 50's, thinking of RE
Tax bracket: 30%
Bank CD's: about 450K
I/EE Bonds: 70K
Muni Bonds: 100K
Mutual funds (IRA): 250K (Amcap, Putnam Voy, MunderNet, Janus)
House paid up - No mortgage

I am thinking of moving a bulk of the money in the mutual funds to a new product offered by Citicorp called Principal Protection fund, which is tied to the S&P index.

Do you think this is a wise move?

I am an extremely conservative person,

Thanks & regards
Balu, I wouldn't do it if my assumptions are correct, and my assumptions (which could be wrong) are:

1. This is a load fund.
2. The expense ratio is relatively high.

I have never and will never pay a sales commission or high annual expenses. If I were shopping for a stock fund, I'd be looking at a no-load index funds that charge no more than about two tenths of one percent annually; either that or exchange traded funds.

I assume that when you say you are an extremely conservative person, you mean that you cannot tolerate investment losses. Two points:

1. Remember that inflation is also a significant risk over long periods. In the process of protecting your nest egg, you could lose real money to inflation.

2. Controlling your investment expenses is one of the most conservative things you can do to protect your assets from loss.

Good luck to you.

Thanks for the reply.

I am looking into the no-load index funds, but they too can lose value (principal) when the market goes south, right?

With the Citicorp's gurenteed fund, principal is protected, but the yield is less than the full S&P index.

Am I wrong with my logic?

1. Are you buying or getting sold?
2.What's your hurry? 3. At 4% SWR you have time to do some reading and pondering how conservative you want to be in ER.

Sorry, I am not following what you wrote.

What is SWR? Is it a return of 4%, and if so where do you get a 4% return these days?


Is this some sort of Equity Indexed Annuity (EIA)? If so, let's be realistic about our assumptions for future returns of the S&P 500 (regular and inside this EIA) and other investment options.

Realistic future long-term returns for the S&P 500 are estimated to be around 5%-7%. For fun, let us be optimistic and say 7%. Now, b/c EIA's do not include dividends (b/c your money is not really invested in the S&P 500 stocks), take the current 1.53% yield of the S&P 500 off that. So we're left with 5.47%. But, that's not all. Most EIA's only credit you with a % of the S&P gains (without dividends). Say your credit % is 85%. Now, we're down to a 4.65% NOMINAL long-term return for this product.

Let us say inflation is 3% (slightly lower than the Post WWII average - again, optimistic). Your REAL return on the EIA would be (1.0465/1.03)-1 = 0.0160 (or 1.60%). That is pretty crappy. Even if this expected REAL return of 1.60% is not realized, you still get your initial 250K investment back, right? Wrong, b/c inflation is eroding that year after year.

Even if your credit in the EIA is 100%, your REAL return would still only be around 2.4% (if inflation is 3%).

Another alternative (since you are apparently very risk-averse) is to take the 250K in the IRA(s) and buy individual 10-year and longer Treasury Inflation Protected Securities (TIPS), and hold them to maturity. I think the 10-year TIPS are yielding somewhere in the neighborhood of 2.3% REAL (or over inflation). Hopefully someone can help me out on this. And obviously the longer maturity TIPS would be yielding a slightly higher REAL yield.

As Bob said, inflation is a major problem in retirement. If you're truly conservative, and want a "safer" and direct inflation hedge, individual TIPS are probably your best bet. I'd also mention that the TIPS are backed by the U.S. Treasury (can't get much better than that), while money in the EIA is backed by an insurance company. However unlikely it may be that an insurance company may fail (and you may lose some or all of your money), it is virtually impossible for the U.S. Treasury to default on its debt.

Also, check out this article on Equity Indexed Annuities:

- Alec
Hi, Balu.

Congratulations on having saved so much! Now you need to educate yourself more about investing in order to protect yourself.

I strongly suggest that you go to

and read everything on the site. I also suggest buying the little book, "The Coffeehouse Investor". The essentials are very brief. Investing is not as hard as salesmen want you to believe.

It looks like your mutual funds in your IRA are not no-loads, which is distressing. It sounds like some salesman has been taking advantage of you.

I can't imagine why you should be looking at a Citicorp loaded product that is "tied" to the S&P Index when you could buy Vanguard's VFINX S&P 500 Index Fund directly from Vanguard without any load fee and with very low annual fees--perhaps the lowest fees of any mutual fund anywhere available from any company. If it has an income component (some fraction in bonds), you could also buy a Vanguard bond fund (also no-load, very low fees). But you already have more than enough bonds. It sounds as if that salesman is talking to you again.

If you retired today (and if I had your assets, I could retire today!), you would be in such a low tax bracket that municipal bonds would make no sense anymore.

In general, it is better to have the income-generating assets (except municipal bonds) inside IRA's and capital-gains-generating (taxed at lower rates than income) and capital-loss-generating (losses are deductible if not in an IRA) assets and municipal bonds outside of an IRA or other tax-deferred vehicle. This is the best for tax efficiency.

If this were my money and I were retiring today, I would
a) move the IRA to Vanguard (Vanguard will help with this),
b) have only individual bonds and bond funds in the Vanguard IRA, and
c) turn most of the bonds and CD's that are not in your IRA into Vanguard stock index mutual funds. I have several different indexes myself, but many people are only comfortable with the S&P 500.

If I were retiring today, I would have 60 to 75% of all of my assets mostly in Vanguard stock index funds (including some international funds) and the balance of 25 to 40% in Vanguard index bond funds and individual TIPS.

As I am still in the capital accumulation phase, I am 100% in equities (50% US, 50% foreign), mostly Vanguard index funds. However, the ups and downs don't bother me anymore. I am more afraid of inflation (which is a permanent loss) than the markets going up and down, even for long periods. I have already eliminated sales loads and high annual fund fees. It may be of some interest that my portfolio has more than recovered from the fall of the last 2 or 3 years, which gives me courage.

You have an excellent start. Good luck to you.

Thank you folks, for all your wonderful suggestions.
Not to take anything away from the others, as I can tell
they have given this question a lot of thought. Of course, I wouldn't touch stocks with a ten foot pole.
Plus, with the starting point which kicked off this
discussion, to me it's a no-brainer. But, that's just me.
I am used to considering the worst outcome on every
investment/ER move. Since I had to do it (ER) with virtually
nothing, anyone who starts out with a big pile looks to me like no brainpower need be applied.
Anyway, there are very safe investments available
which would yield 5% to 7%. If you value predictability
as I do, and you have substantial assets, why look

John Galt
Hi Balu,

The main advice that you should gleen from the above is to slow down and educate yourself. Do not buy any financial instrument that is being 'sold' to you. There is a commission in there that you don't need to pay!

And JohnGalt while I agree in the past 20 years there have been many safe 5-7% investments, i don't see any today. - Please enlighten me! - I'm ready to invest!
Hello Cut-Throat! Re. "safe" investments, I was once
almost 100% CDs (plus my real estate). Finally rates
dropped so low I could not tolerate it any longer and
switched to bonds with laddered maturities and varying
degrees of risk. Thus, while I am still receiving about the
same yields, no more FDIC back up. I guess you could
say that I am diversified, but only within the world
of bonds and notes (again, ignoring the real estate).

John Galt
Hello - dumb question time again.

What is safe? I suspect it varies with each individual ER - nailing down an income stream versus fighting inflation erosion of spendable dollars. Or some combination of both.
Some one said there is no such thing as a dumb
question. What is "safe?" is like asking
"How much is enough?. Varies for everyone,
Safe for me used to be FDIC insured. In fact, if
someone predicted 4 years ago that I would have almost all off my meager stash in non-FDIC vehicles
I would have thought them daft. Anyway, my bond
and bond-like investments are mostly in investment
grade rated bonds, or funds with long term track
records, or if I do bend a bit on a rating, it is with
a company that is so big the halls of congress would
crack with a hint of a default (so hopefully the
government would prop them up like they did with
Chrysler). All of these decisions were made after a lot
of thought. It was easier when I just found the bank with the highest rate and sent them the money.

John Galt
"Safe" indeed means different things to different people. I, for example, would not feel at all safe with a portfolio consisting entirely of fixed income investments. There have been several periods in this country's financial history when such a portfolio has been completely plundered by inflation. Any sort of detailed investigation of equity/fixed balance ratios shows that historically, the safest portfolio requires somewhere between about 50/50 and 70/30 split for these balances. Although this may not seem consistent with the past three years of financial history, it has been consistent with long-term history and I feel safer planning my portfolio with that in mind.

It may turn out that neither strategy is "safe". In reality, "safe" is a state of mind and that is a very personal thing.
Circa 1993,safety was minimizing standard deviation via wide diversification of my 401k rollover/IRA - 7 funds. Income to cover daily living came from her salary, rental property, conv. bond closed end fund,stock dividends(mostly utilities).

I have several pages of old calculations - one shows 7.98% expected growth with 9.377 std. dev. - somewhat amusing now - also that portfolio had 30% international pacific/europe index funds, 5% gold, and preferred stock in place of an international bond fund. Overall 50/50 stocks/bonds.

After reading Bogle's 1994 book converted all IRA's to Lifestragety funds to get a 50/50 stock/bond mix.

In 2003, I still have a bi-polar view of "safety" - nail down an income stream to cover core expenses( stock div. high yield bond, REITS, pension in 1998, etc.) and ignore Mr. Market's fluctuations. Then use my 50/50 portfolio for long term "safety" based on history and 4% max. withdrawal as a guidepost.
Some good advise from the people on this board.
They are correct - don't rush it.
Is your advisor recommending you put all or part of your money into this s&P diriviative?
You need to look into the following.
1. What is your retirement expenses?
2. What will your cash flow requirements be?
3. How to build a balanced portfolio to meet your needs.
4. Learn about the investment vehicals - if you don't fully understand them - don't go into them.
5. What is your risk tolerance?

Personally, I think you have to ask yourself where do you think the market is going from here? Are we at the bottom of a new bull? Is this just a bull move in a secular bear market?

I think there may be fractionally more upside from today, maybe s&P 1100 or 1150. Not enough upside potenital for me to go into the market.

2005 is the year I fear the most - once the election is over - then we could be in for another big decline - That is when I would invest my money in the market.

I've posted twice to this board and received some good feedback.
goo luck

Thank you all for your wonderful suggestions.

I am trying to read as much about Asset Allocation techniques, but the more I read the more confused I get. Also, these techniques require making certain assumtions such as what the interest rates are going to be in a few years, which is anybody's guess.

Anyway, I came across another product offered by HSBC which is similar to the one from Citicorp which I mentioned in my original thread. This is an HSBC 5 year CD FDIC-insured, with a minimum gurentee return of 1.17% annually, tited to S&P 500 index, and a maximum quarterly return of 5% based on S&P performance.

I thought this is a cute product and wanted to share it in this forum and get some opinion. It guarentees the principal plus a small return on the downside, while getting the benefit of the market returns to some degree and offering FDIC protection.


Foundations are required to withdraw/give away 5% minumum to maitain their tax status. You might want to read Bogle's Otober 31,2002 address on Vanguard website. I'm not saying that you need to withdraw 5% or even 4% or have a "forever" life span like a foundation but it might give you some food for thought.
This is an HSBC 5 year CD FDIC-insured, with a minimum gurentee return of 1.17% annually, tited to S&P 500 index, and a maximum quarterly return of 5% based on S&P performance. I thought this is a cute product and wanted to share it in this forum and get some opinion.
Sounds like another gimmick. I wouldn't even consider it.
Here is some reading for you:

A general article on principal protection funds:,3496,90746,00.html?CN=str777
<note - I can not get to the link anymore....>

and an article favoring them:

From Citicorp's (i.e. Smith Barney) principal protection fund prospectus:

What does ""Principal-Protected'' Mean?
""Principal-Protected'' means that your principal investment in the certiÑcates is not at risk due to a
decline in the Index. ""Principal-Protected'' does not mean that you will receive a return of your principal
investment in all cases. Under certain circumstances, losses realized on the assets of the trust will be borne by
the holders of the certiÑcates. In particular, upon the occurrence of a default by the swap counterparty and the
swap insurer or upon the occurrence of a term assets credit event, you may receive less than the principal
amount of your investment. For a description of what constitutes a term assets credit event, of certain
provisions of the swap agreement and the obligations of the swap insurer, see ""Description of the Swap
Agreement ÌPayments Upon Term Assets Credit Event,'' ""Ì Termination of Swap Agreement,'' ""Ì Payments
Upon Swap Termination Date'' and ""Description of the Policy.''


See ""Currency Risks.''

Also the trust is formed in the Cayman islands - I wonder why? In addition there are Federal income tax consequences - you have to make certain elections with respect to the fund and pay taxes on income not recieved yet. Also the trust has an end date of 150 years if certain earlier conditiond are not met....

It is set up and funded by a derivitive play of some kind - I don't claim to understand it. But there are enough red flags I would certainly want to get someone who understands it to go over it with me before I bought into it. It sounds like 70% of the money goes into interest funds, and the remainder is into the hedge fund.

There are good ways to use hedging, derivitives, etc. Most of the bad press is from a very 'piggy' application of them. It seems that they are investing most of the money in commercial paper (some kind of ' MBNA master credit card trust") and using interest to fund the derivitives.

The S&P index contribution is capped in the positive direction, but not in the negative. I don't know how it would have behaved in the past, but it might be good to investigate. A single very bad quarter can wipe out a number of positive quarters, since any give quarter is capped

The need for a 108 page prospectus means this is not as simple an investment as it appears. Also underwriting expenses are .35 per $10, or 3.5%. Think of that as a front end load.

So it may be a good deal....but it would sure take a bit of work to figure it out. It is considered a 'structured product' and the high end finance companies devote lots of salary dollars to the people who put them together. It sounds like they put quite a lot of work into making it work. I could not find an FDIC insured product - maybe some of them invest in underlaying FDIC insured funds. Bottom line, be careful - read everything they have on the fund, especially any risk sections.

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