Watch expenses when putting your retirement into a mutual fund 'wrap' account

Q I am almost 70 and expect to retire this year with an IRA, 401(k), and company lump sum totaling about $1.5 million. I plan to roll everything to an IRA, but will keep about $100,000 in liquid assets in the IRA for house renovations. The rest ($1.4 million) would be invested with the idea of paying us about $30,000 a year.

I have been approached by several financial planning institutions offering to manage my investments for an annual fee of 1.25 to 1.5 percent. I agree with you that such expenses could represent a large amount of my investment earnings.

My Social Security income is about $24,000; my wife is 52, and I expect her to live to about 95. I expect to live to 90. She earns $30,000 and expects to retire at 65. She will then get about half of my Social Security.

We would like an annual income of $76,000 to $84,000 after taxes. Can you suggest a fund mixture with low management fees we can invest in (such as the Couch Potato)? Also, how do we go about arranging for monthly or quarterly payments?

J.P., Los Angeles

A You've got two issues here. The first is setting reasonable expectations for your retirement spending. The second is sorting out what is acceptable for investment-management fees.

Your expectations are reasonable. There is no reason a couple with good Social Security benefits and $1.4 million in investment assets can't enjoy after-tax income approaching $84,000.

You should be able to draw from your investments at a 4 percent annual rate without endangering your portfolio's long-term survival. That provides income of $56,000 from investments, $24,000 from Social Security, and $30,000 from your wife's earnings -- a total of $110,000. The California state income tax could take your net below $84,000, but you'd still have a minimum $76,000.

Later, when your wife retires, your total income would be $92,000 -- $56,000 from investments, $36,000 (or more) from Social Security -- and your after-tax income would still be over your $76,000 minimum. In addition, you should be able to nudge your withdrawal rate higher at that time because you'll be 83. You could, for instance, convert a portion of your investments into a joint life annuity.

The most common investment management offer is called a mutual fund "wrap" account in which a firm offers to manage your money for a fixed percentage of assets, and the money is invested in mutual funds. (Another version of the same idea puts the money in separate accounts rather than mutual funds.)

As a consequence, it is important to understand the total expenses you are facing. When the underlying management expenses of the funds are added, for instance, you could be looking at total expenses of 2 percent a year, or more. This is likely to have a major impact on your investments.

You should be targeting total expenses of 1 percent a year or less. With your assets, you have many choices.

You could be self-managed with a simple Couch Potato Building Block portfolio for less than 35 basis points a year.

Another choice would be to invest in one or two low-cost funds with good long-term records -- such as the balanced fund Vanguard Wellington (annual expense for Admiral shares, 0.18 percent) or Fidelity Puritan (expense ratio 0.62 percent).

You could also find a broker with a "big book" of clients in American Funds. There would be no up-front commission cost because your investment would be over $1 million. The annual expense ratios of their funds vary, but a large and successful fund like American Funds Income A shares has expenses of only 0.54 percent a year. Of that amount, 23 basis points would be paid to the broker as a "trail" to provide continuing service.

There are also "boutique" firms that manage portfolios for individuals and families. Their pricing tends to be lower than major brokerage firms. Among these firms it is possible for the $1 million and over investor to have total management costs under 1 percent a year.

In my experience, the "you get what you pay for" claim from high-cost firms is bogus. Pricing is a function of the business model of the firm and the amount of wood and marble in their offices.

However you invest, it is easy to arrange for monthly or quarterly disbursements -- quarterly makes more sense.

Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.