How a falling dollar sinks your retirement

By Bankrate.com

It's hard enough to save for retirement in good times, but when the dollar appears to be in an endless swoon, it may mean that you need to save even more before saying goodbye to your job.

A falling dollar loses buying power in relation to other currencies. When the dollar falls against the euro, it's more expensive for Americans to pay for lodging, food and souvenirs in countries that use the euro, and it's cheaper for people from those countries to visit America.

But it's not just Americans traveling overseas who need to concern themselves with this. A weak dollar triggers a rise in prices that can boost inflation and reduce purchasing power. If you're counting on $50,000 a year in today's dollars to cover expenses in retirement 20 years from now, you may find that you'll need closer to $75,000.

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"The falling dollar by itself is really not a danger," says Jason Flurry, the president of Legacy Partners Financial in Woodstock, Ga. "Currencies rise and fall all the time with very little effect on the average consumer. But it's one of those things that can bring an economy to its knees if left unchecked."

Frank Trotter, the executive vice president at EverBank in Jacksonville, Fla., says he expects the dollar to decline for at least three to five more years.

Protect your portfolio

What can you do to help protect your portfolio against the falling dollar? One way is to maintain exposure to international stocks and bonds.

Trotter recommends foreign currencies, which his bank offers, in the form of money market funds and certificates of deposit. Check the yields on EverBank's foreign currency CDs and you'll see that some countries offer better returns than you'd get with a U.S. bank CD. But do your homework before investing or you could lose principal.

"Don't look at the list and go for the highest yield," Trotter says. "Iceland has an eye-popping rate, and if someone says 'I'm going to earn 12% on this,' they could be in for a big surprise. It's a small country with a volatile currency, and it's always subject to ratings changes by Standard & Poor's.

"Our viewpoint is that you should build a portfolio of three or four of the major currencies," Trotter explains. "Pick something out of Asia -- maybe Japan or Singapore -- Europe, Sweden, Norway and the South Pacific, like Australia. That way you're diversified against any one sector's change, and you're not in a currency that's likely to have a precipitous drop based on some small event."

EverBank's CDs are insured by the Federal Deposit Insurance Corp., but that's against bank failure, not a deflating currency. There's considerable risk in currency movements, and you can lose principal.

A different international view

Flurry agrees that international exposure is needed but believes it should be in stocks and bonds.

"Currencies and gold are a zero-sum game because they don't produce anything," Flurry says. "With currency, it's just speculation. If our currency goes up in value, it means somebody else's went down in value. The next time it might go the other way. It's not like anything was really produced; it's just prices and value that have changed. They will change again. So, trying to predict that and make investment decisions on that is just pure speculation.

Continued: 3 factors to consider

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