Recent retirees with withered 401(k) plans have been the hardest hit by the recession. They still need growth to finance 20 or even 30 years of retirement, but they also need to protect their principals, because there's no income from work to help recoup losses. Declining balances mean many retirees need to re-evaluate their income strategies.
Here are five ways retirees could alter their investments, according to a handful of money managers, along with assessments of how investments are likely to fare in each scenario:
Diversify and rebalance. One way to weather the recession is to rebalance into a reasonably diversified portfolio: perhaps 50% in stocks, 40% in bonds and 10% in cash. That generally means reallocating more money to stocks during bear markets and shifting money into bonds or cash during bull runs in order to maintain the same percentages.
"You should rebalance at least once a year back to your original asset allocation," says Stephanie Giroux, the chief investment strategist at TD Ameritrade. "But if you think that risk level is no longer appropriate, you may want to reconsider it."
More from MSN Money and U.S. News
Taking a slightly higher risk of losing principal can potentially mean higher long-term returns. "The sweet spot between reliable and sustainable income and the potential for upside growth is 40 to 60% in stocks," says Rande Spiegelman, the vice president of financial planning at the Schwab Center for Financial Research. "No matter how aggressive you are, retirees who are just retiring and (are) going to start relying on their portfolio for income should have no more than 60% of their portfolio in stocks. If you are risk-averse, have at least 20% in stocks so you can keep up with inflation."
Shift slightly more conservative. The recession has many people re-evaluating the level of risk they can live with, and some are seeking greater safety. "You could become more conservative in terms of your overall asset allocation and still have your assets last when you combine that more conservative portfolio with several different lifestyle changes -- such as a reduction of overall expenses and not taking any cost-of-living adjustments on withdrawals for a five-year period," says Ken Hevert, the vice president of retirement-income product management for Fidelity Investments, about switching to an asset allocation of 50% bonds, 20% stocks and 30% cash in retirement.
James Shelton, the chief investment officer of Kanaly Trust in Houston, agrees that retirees should choose conservative investments in the short term. "We are encouraging all our clients to have no more than 30% in equities," he says. "We like the highest-quality corporate and municipal bonds, but we are avoiding high-yield bonds based on the expectation that we are going to see a massive wave of defaults."
Video on MSN Money
Saving your retirementMany investors who have watched their retirement funds shrink over the past few months are wondering how to rebuild their portfolios.
Leave the market until it stabilizes. Some retirees don't have the stomach for the wild swings in the stock market that have made headlines over the past several months. "Going all to cash for a two-year period and then rebalancing to the 50% equity portfolio also proved to work well," Hevert says. "You are giving up the potential for gain in equities in the short run, but it still improves the overall longevity of your money."
But exiting the stock market now may mean that you miss out on significant gains during the recovery. "You don't want to market-time, because if you liquidate everything thinking you will get out and get back in you will probably miss the opportunity to make the market work for you when it goes back up," cautions Giroux.
Continued: Convert to all cash and bonds
Rate this Article
High
