USA: Stay Diversified In Retirement If Nest Egg Not Needed Immediately

The journey By Janet Kidd Stewart CHICAGO (Chicago Tribune), January 27, 2008: If you're retired, must you therefore build a bond ladder? A 60-year-old California reader recently asked if she should purchase staggered-maturity Treasury or inflation-protected bonds for her portfolio, which is now invested mostly in index and retirement-target-date mutual funds. Although she's retired, she indicated she has sufficient other income for the next 15 to 20 years and won't need to touch her investment portfolio until then. Buying individual bonds has become easier and cheaper through the Treasury Department's Web site, http://www.treasurydirect.gov , but there may be other factors to consider. The first question is whether she truly has no need to touch that money for two decades. Inflation and health-care costs have a way of eating away at some of the best-laid retirement-spending plans. If she indeed can hold off for that long, experts said, there may be better strategies than selling those stock-holding funds in the volatile market and building a bond ladder. How long will it last? This brings up a second question: Is the investment account large enough to pay for whatever she has earmarked it to handle in the future, so that all it has to do is keep pace with inflation? Or does she need it to grow beyond that? Knowing how long money can go untapped and how much it must grow to fit your objectives are two concrete things investors can use to help determine the appropriate amount of investment risk to take, said Armond Dinverno, a financial planner with Balasa, Dinverno & Foltz LLC in Itasca. When markets slide, many investors realize they had constructed their portfolios with far too much risk for the objectives they outlined, Dinverno said. "It's a behavioral issue for a lot of people," he said. "It doesn't matter the size of their portfolio or the time horizon. If they're down 30 percent, they aren't disciplined enough to reason that they don't need the money for 20 years. They can't hold on" and decide to sell at the wrong time. Then, of course, they lose out when the market recovers. If the woman in California only needs to stay ahead of inflation, she could, indeed, put it all in inflation-indexed bonds, Dinverno said. But how will she feel a few years from now if stocks are soaring again? She also will face reinvestment risk if she invests in a ladder of Treasuries, Dinverno said. (As her near-term bonds mature, she would be reinvesting into whatever yields new bonds were paying.) Create a personal mix A better strategy, he said, might be to maintain a diverse mix of stocks, bonds and alternative investments such as real estate and commodities. If the mix in her target retirement fund is out of sync with her investment time horizon, she could create her own mix with, say, 60 percent stocks and the remainder in bonds and alternatives, he said. A more conservative mix could give her potential investment growth while still protecting the downside, said Gail Buckner, a financial planner and retirement specialist with Franklin Templeton Investments in San Mateo, Calif. The company hired Ibbotson Associates to study different withdrawal rates (from 3 percent to 6 percent) and their effects on portfolios with varying types of assets. Among them, the highest likelihood of success, defined as the likelihood that the portfolio wouldn't run dry after 30 years, came from a portfolio with 28 percent invested in U.S. stocks, 12 percent in international stocks, 40 percent in bonds and 20 percent in very short-term, cash-like investments. Even at a 6 percent withdrawal rate -- higher than many planners recommend -- that portfolio had a 94 percent probability of lasting 30 years, Ibbotson found. "I'm not suggesting this is the perfect allocation for every retiree," Buckner said. "The important point is the diversification." Marital status and tax situation also can play a huge role in what type of income strategy retirees should adopt, but if you're sure you have a chunk of years in retirement before you have to start making withdrawals, Buckner said, why not stay diversified and try to let the nest egg grow? Copyright © 2008, Chicago Tribune