Costco Connection - July 2011

FINANCIALconnection

Also:

■ Giving up time-share ■ Variable annuities

Ask Suze Orman

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Balancing risk and yield

By Suze Orman

I have $3.5 million in savings and I have no mortgage payments. Please advise of a sound investment that can generate $200,000 to $250,000 a year or more with the principal 100 percent protected.

We have a vacation time-share that has become a burden due to escalating maintenance fees. How can we legally give up our time-share?

Peter B.

Dana Point, California
Norm E.

Suze will answer
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Suze Orman’s TV
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WHAT YOU ARE asking for doesn’t exist. You can’t earn a high yield with absolutely no risk to your principal.

So, do you want absolute principal protection or do you want the opportunity to earn a higher yield?

If your answer is “both,” then your first step is to divide your $3.5 million into two separate accounts for your two separate goals.

Decide how much you really want to be 100 percent safe, and that money stays in short-term bank deposits or Treasury bills. The goal of that money is not what it earns, but what it provides to you in peace of mind. That has a tremendous value.

For the remainder I suggest there are two possibilities: municipal bonds or high-quality dividend-paying stocks.

I recommend looking into “essential service” general revenue bonds—say, for water or sewer projects. People keep paying those bills no matter what, so that makes it all the more likely the bond issuer will be able to keep up the interest payments to you.

Because I expect interest rates to rise in the coming years, I don’t advise investing in long-term bonds with maturities of more than five to seven years; remember that as yields rise, bond prices fall. If you hold bonds to maturity you’re fine, but if you want to sell before maturity the price you get could be less than what you paid. And most important, when yields are rising you want to be able to reinvest your money at those higher prices. I recommend you work with a municipal-bond specialist who can build you a laddered portfolio of various maturities.

I also think blue-chip dividend-paying stocks
are a great way to earn income right now. You can
earn 4 to 5 percent from quality companies. But I
a
able to reinvest your money at those higher
op
can ride out the ups and downs of the market and

BRIAN BOWEN SMI TH

I WISH THERE WERE an easy answer to this, but many time-share owners have exactly the same idea as you, which can make it very hard, if not impossible, to find a buyer. The most important advice I have for you is to not pay anyone or any company an upfront fee to get rid of it for you. These are often scams; you pay money and nothing happens.

If you haven’t already made contact with the corporate owner of the time-share—not the local sales office—to discuss your options, that is your first step. Let them know you will not be able to keep up with the payments and you will let the property go into foreclosure if need be. If they are smart, they won’t want that to happen any more than you do, and may be willing to negotiate a deal. But in markets flooded with people looking to get out of a time-share, that’s a long shot. As hard as it is to spend more money on this, a solid lawyer with experience in dealing with time-shares and real estate foreclosures is going to be a good investment for you right now.

I will be 75 this September. I was considering retirement, and our financial adviser suggested that we take $150,000 from my 401(k) and invest it in a variable annuity [VA], which would yield $800 a month. Now that I have decided to continue working, is it advisable for me to pursue this?

Shyam S.

Reisterstown, Maryland

NO, IT IS NOT. Even if you had stopped working I wouldn’t recommend this strategy. I never recommend variable annuities; they often do more for the person selling them than for the person buying them. Your adviser likely gets a hefty commission and you will end up paying fees embedded in the VA that are way too costly. I do not like variable annuities, plain and simple, and I would think twice about any adviser who suggests you invest in one. C