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Dear Mr. Berko: I have a self-directed 401(k). In mid-2007 it was worth $400,000 and I was hoping that if the market could average its historical 9.6-percent return, it would be worth $1 million when I retire at age 67 in 10 years. I was hoping to withdraw 5 percent, or $50,000 a year (without touching the principal). Combined with our Social Security, it would give me and my wife at least $75,000 in income. She had a job but lost it when her company went out of business; her income paid taxes for our mortgage (now underwater).

Today my 401(k) is worth $223,000, and my retirement plans have gone up in smoke. I鈥檓 reluctant to suggest that I will inherit one-third of a $600,000 life insurance policy from my father, who is dying soon from cancer. And if I can earn 9.6 percent (which is what the Dow has done since 1948) on that inheritance and my 401(k), my wife and I can reach our retirement goals in 10 years.

So can you please help me and tell me how I should invest this money so I can meet my retirement goals?
D.J.
Ann Arbor, Mich.

Dear D.J.: I鈥檓 certain as a sunrise and a sunset that: first, your Social Security benefits may be greatly reduced when you retire in 2020; second, federal and state tax rates may be 30 percent to 40 percent higher in the coming 10 years; third, the Dow Jones鈥� 9.6-percent historical total returns may be closer to 7 percent during the coming decade; fourth, the standard of living for all Americans (except the wealthy and the poor) may be lower for the foreseeable future; fifth, corporate revenues and incomes may be measurably lower than pre-2007 levels; sixth, home values may not reach the pre-2007 levels for a long time to come; seventh, the Dow Jones Industrial Average may not return to its 2007 highs before you retire; eighth, inflation may smother your buying power by 50 percent; and finally, today鈥檚 money managers don鈥檛 understand the changed economy and the different metrics of the new economic infrastructure.

I know that it鈥檚 infinitely wiser to depend on dividends and dividend growth rather than principal growth.

And you must employ the right adviser because this is a different market, and the old rules are less likely to work. This adviser must select investments that have 4-percent to 6-percent dividend yields with semi-regular or regular dividend increases. These issues should have minimum average annual appreciation potential between 3 percent and 6 percent over a 12-year time frame. So if you add a 4-percent annual appreciation to a 5-percent dividend, you have a 9-percent total return; and at 9 percent, your investment doubles in eight years, or sooner if you reinvest the dividends. These issues can be preferred shares trading at discounts, convertible bonds, convertible preferreds, common stock, business development companies, REITs, deep discount corporate bonds, pipeline companies, exchange traded shares, closed-end funds, etc.

There is a cornucopia of issues that in the coming years can provide the dividends, the dividend growth and performance you need to reach your goals, many of which have been discussed in this column. Certainly some of the safest investments to use are closed-end funds and exchange traded funds that own portfolios of REITs, convertibles or high-yield bonds, etc. They鈥檙e safer because rather than owning two or three high-yield REITs, or two or three convertibles, you would own a closed-end fund with a portfolio of 50 or 60 REITs or convertibles.

You can ask me what I think of Maggot Chemical or Dumpster Pharmaceutical, and I give you my opinion.

And if I don鈥檛 have an opinion, I can make one up. But I cannot propose a portfolio for you without knowing a heck of a lot about your personal and financial lifestyles. You must employ a money manager because it鈥檚 too difficult to do it yourself. But few of these fellows have the skills to employ the above strategies, which are slow, unexciting and as boring as watching milk sour. Today鈥檚 money managers are high-tech, go-go, fast-track lads who haven鈥檛 held equities more than a year and believe preferred stock is the best beef on the hoof. You need a manager who understands the metrics of income and growth, of closed-end and exchange-traded funds, convertibles, preferreds and discounted high-yield investments. He must understand the new economy, the new market and why providing retirement income from dividends is a far safer and more certain goal than hoping for capital gains as income. He must possess good judgment that derives from experience, but which comes from lots of bad judgment. You need a manager who has been doing this for the last 20 years, and not a 鈥渘ewbie鈥� who just jumped on the bandwagon.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or e-mail him at [email protected].
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