Steamboat Pilot & Today

Q. What Web sites are your favorites for retirement planning?

A. Web sites that help you plan for retirement are one of the bright spots on the Internet. In particular, it is the retirement-planning calculators that make these sites so useful. They make it easy to test different scenarios. Tinker with any variable -- the inflation rate, for example, or your desired retirement income -- and you can quickly see how that change affects your retirement plan.

For educational content and high-quality advice, Vanguard's Web site (www.vanguard.com) is unsurpassed. An entire section of the Web site is devoted to retirement planning and filled with articles that explain retirement concepts and help you develop realistic expectations.

T. Rowe Price's Web site (www.troweprice.com) is a solid runner-up. Like Vanguard, it has a good primer on the fundamentals of retirement planning.

No matter which online calculator you use, you'll be asked to plug in assumptions for things you might not know too much about, and some of the sites aren't too good about giving you guidance. So here are some tips for using the calculators:

n Expect an inflation rate of about 3 percent.

n For retirement living expenses, assume that you'll need about 75 percent of your preretirement income to live on.

n For an investment portfolio with a 50-50 mix of stocks and bonds, it's reasonable to expect a return of 8 percent.

Q. I've been hearing a lot of criticism about investing in mutual funds, much of it focusing on the fact that a large percentage of funds don't beat the market averages. Would I do better, as suggested by a book I read recently, in stocks of my own choosing rather than investing in stocks through funds?

A. View the returns that these authors are claiming with a healthy dose of skepticism. Book authors, unlike mutual funds, are not subject to Securities and Exchange Commission regulations, and they don't have their returns independently audited.

For example, the Beardstown investment club in Illinois claimed an annual market beating return of 23.4 percent on its book cover and sold scads of books before a reporter figured out that this return was a fraud and it actually had underperformed the market averages (earning just 9 percent per year versus the market average of about 15 percent)!

While it's true that the majority of stock mutual funds underperform the stock market averages, that does not argue for investing in individual stocks. I can guarantee you that an even larger portion of stock-picking individual investors underperform the market averages.

Index funds, which mirror the broad stock market averages, are a good way to invest. You also can increase your odds of beating the market averages by shunning funds with high fees and undemonstrated track records.

Q. If I follow the direction of interest rates, which ones are good ones to watch?

A. These are three primary indicators of the direction of interest rates: First is the prime rate, which is the interest rate banks charge to their most creditworthy (read large, stable, corporate) customers. Loans to less creditworthy customers are tied to this rate but are higher.

Another is the federal funds rate, which is the interest rate charged by banks with excess reserves that are lending to other banks needing overnight loans to meet Federal Reserve requirements.

This rate is set daily, and for this reason it is the most sensitive indicator of the direction of interest rates.

Finally, there is the discount rate, which is the interest rate the Federal Reserve charges member banks for loans, using government securities or eligible paper as collateral. This rate provides a floor on interest rates since banks set their interest rates above it.