Q. I work for a large company and will probably retire next June. Most of my fellow employees that I work with are also retiring and putting their 401k and buyout money in managers hands at about a 2 percent fee. I have some money in a Variable Annuity. Do you think a Variable Annuity is a good place to put my retirement money? What are the good and paid points of a variable annuity?

---W.T., Homer, IL

  

A. A variable annuity can be a reasonable investment for someone in a high tax bracket who is trying to accumulate money for a later retirement but has already "maxed out" on other accumulation vehicles such as 401k or IRA accounts.

The extra tax deferral comes at a price, however: a variable annuity contract typically adds about 1.2 percent a year to the cost of managing your money. If the investment period is long enough this cost burden can be offset by the advantage of tax-deferred growth of your investments. It is also possible to find VA contracts with much smaller cost burdens.

You and your friends, however, are retiring next year. You aren't accumulating for a long period. Starting next year you will be taking a good portion of the return on your investments as your spending money. In that context, a variable annuity doesn't make much sense. It's an expense without much of a benefit.

The alternative is to do an IRA rollover with your 401k money. This will preserve your tax deferral and give you a nice array of investment choices in mutual fund families.

A two percent annual fee to a manager, by the way, is another expense a retiree doesn't need to have, particularly if the manager is making mutual fund selections for you. ( You didn't say whether the managed money was in individual securities or mutual funds.) While the difference between a superior portfolio and an inferior portfolio can be very large in a single year, it narrows over long holding periods. Over the last 15 years, for instance, the difference between the 25th percentile balanced mutual fund and the 75th percentile mutual fund was 14.37 percent a year versus 12.39 percent---- just under 2 percent a year. The odds against any manager bringing in a higher performance than an inexpensive index fund such as Vanguard Balanced Index are at least 2 to 1… and that's before the managers fees are considered.

Tell your friends to think twice about this deal.

  

Q. I am 58 years old and have just been layed off from my job. My company 401k account is $116,000 which is invested in the following Fidelity accounts: 36 percent Asset Manager: Growth; 36 percent Equity Income II; and 28 percent Value Fund.

For my age am I invested in the correct accounts for low to moderate risks? I have choices of most of the Fidelity Investments funds.

Also, at age 60 I plan to start drawing either $1,000 or $1,500 per month from my 401k. What is the period of time that I would be able to continue drawing for each of these amounts until the account was depleted?

---P.U., Mounds View, MN

  

A. For someone about to start drawing retirement income you have a very large commitment to equities. Fidelity Equity Income II and Fidelity Value are both pure equity funds. Asset Manager: Growth typically has 65 percent equities but had 75 percent at the end of May. In effect, you are 90 percent committed to the stock market. A lower risk mixture would have about 40 percent in fixed income.

Fidelity has two excellent taxable bond funds that receive top ratings from Morningstar, the Chicago firm that reports on mutual fund performance: Mortgage Securities and Corporate Hi-Yield with recent S.E.C. yields of 6.5 percent and 8.6 percent, respectively. I suggest redeeming Asset Manager: Growth and enough of Equity Income II to have 40 percent in fixed income. And split the bond money between the two funds. In the Corporate Hi-Yield fund you should limit the amount of income you take to 7 percent, allowing the remainder to be reinvested.

A portfolio like this might produce a long term total return of about 9 percent a year. If the stock market and bond prices didn't go up and down, you could expect it to last about 20 years at $1,000 a month and about 9 years at $1,500 a month. In fact, because markets are irregular, it would not last as long.

You would be much safer at a rate of withdrawal that came much closer to the rate at which the portfolio produces income, say 5 or 6 percent a year.