Low Margins

Q Should I avoid companies with low profit margins?

— T.F., Tampa, Fla.

A In general, higher-margin companies are more promising than lower-margin ones. High margins can reflect some competitive advantages, such as a strong brand. Also, amid a price war, companies with higher margins have more wiggle room. Still, you shouldn't necessarily avoid lowermargin businesses.

Imagine that Buzzy's Broccoli Beer (ticker: BRRRP) has a whopping net profit margin of 28 percent, while Scruffy's Chicken Shack (ticker: BUKBUK) has only a 2 percent margin. If Buzzy's sells only five beers a year, while Scruffy's sells out of chicken each week, Scruffy's may well be the better buy, generating more cash in total than Buzzy's.

Some industries, such as software, typically have high profit margins. Discount stores and supermarkets typically have very low ones — but if they turn over inventory fast enough, they might still be good investments. Wal-Mart's margin, for example, is around 3 percent. Q How much will health care cost me in retirement?

— D.E., Mankato, Minn.

A According to recent estimates, the Medicare trust fund is expected to run out of money by 2017. Not so long ago, the expected date was 2026, but rising health-care costs, lower tax receipts and new prescription-drug policies are having an effect.

Medical expenses not covered by insurance or Medicare must be paid for out of a retiree's nest egg. How much will be needed to cover such expenses? According to Fidelity Investments, an average 65-year-old couple retiring this year will need to have $240,000 socked away just to cover health-care costs for the following 20 years (this doesn't include the cost of long-term care).

Get retirement-planning guidance at www.fool.com/retirement.htm.

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