Expert: Paul Henneman - 12/6/2005

Question
My husband and I will retire April 2007, I will be 63 he 74. I will not be taking my SS at that time. Moving to La Paz Mexico and living comfortably on 2300 a month.  I would like to take about $1000.00 a month from funds without touching the principle. We will have about $400,000 to invest. Index funds sound interesting, but we are real beginners.  Do you think we could invest in index and take out 12-15,000 a year? In three years I would take my SS and only need to be taking out about $500 monthly.

Answer
Maria,
  Thank you for your question! Yes, I think that you are very much on track. I do have several things to offer regarding index funds.
   These are mutual funds that trade overall stock market indexes, and so can be expected to approximate overall stock market performance. This means that some years will be good, some bad. For example, if you were invested in index funds in 2003, you may have made 30% or more return. But if you were invested in index funds in 2001, you may have lost nearly 40%.
   Overall your strategy is sound, I simply caution that in times of poor market performance you will not have the returns to use for your living expenses. In these times you will be using your principal. The market always recovers, sometimes it takes longer than others. As long as you are comfortable with this, it is fine. The trick is to not lose sleep if your portfolio fall in value 10, 20 or more percent. Stress should not be a part of retirement!
  There are some things that you can do to help protect you rself from this further. I would suggest that you consider putting about half of your portfolio in index funds. The rest could be divided up among other funds that specialize in different segments of the economy. When the overall market does hit a bad time, it almost never hits all segments of the market at the same time. If you hold some funds that specialize in technology, health care, biotech, real estate, utilities, and/or other market segments you will most likely see better returns, and also less volatility. That is good for your situation.
   A stock portfolio consititing of about 10% of your overall portfolio may also be advisable, but require more attention and time to maintain. A stock portfolio of about 20 stocks will further diversify your portfolio. There is a great service out there call FOLIOfn (www.FOLIOfn.com). they offer great trading prices, and have dozens of already formed stock lists that you could purchrase, with information on the past performance. Think of this as forming your own mutual fund, but you have control on what you hold.
   Another great resource is 'Investing for Dummies'. Silly and somewhat insulting name I know, but this book actually offers a good basis of knowledge for a wide variety of investment types. There are notes and information on where to do more research if something interests you. While I think that you are on the right path, I strongly recommend that you read this to be sure that you are aware of the different options.
  The overall goal is to set up your finances so that you are very comfortable and at ease with them. If you find yourself stressing, and really worrying about small fluctuations in your portfolio, time to change your approach. I would suggest that you really have two goals in retiring: financial stability, and ease of mind to enjoy it! Good luck, I wish you the best. Please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com