Retirement Planning Amid Market Mayhem

First, how much money do you want to commit to stocks (always in the form of well-diversified stock mutual funds)? In one recent column I suggested as little as 20 or 30 percent for people who will rely on their savings to pay their bills, with the rest in diversified, high-quality fixed-income vehicles such as bonds, bond funds and insured bank CDs. You might also consider an annuity that begins paying immediately.

Some savers think it's crazy to buy bonds. For years, they've heard naysayers predict that — at any minute — the federal deficit will spark super-high inflation and interest rates. If that happened, it would drive a stake into the value of fixed-income investments.

So much for predictions. Over the past 10 years, long-term Treasury bond funds have returned 7 to 8 percent a year.

The U.S. economy is too fragile today to support rising interest rates and inflation, except for short interim periods, says economist and bond maven Lacy Hunt of Hoisington Investment Management. The federal deficits, if they’re not addressed, might push up interest rates someday, he says, “but that day is not at hand.”

Second, if you’re earning a paycheck, continue to invest steadily in your 401(k) or other retirement plan, including the portion that you’re putting into stocks. You’ll be glad you did when the market swings up again.

Fidelity Investments last year studied the fortunes of 7.1 million participants in the 401(k) plans the company runs. People who left the stock market during the downturn in October 2008, and never returned, gained an average of 2 percent through June 2011. Those who exited and returned gained 25 percent. Savers who kept at least some money in the market through the entire period gained an average of 50 percent. They bought stock at lower prices, which eventually served them well.

Finally, resist selling stocks in panic. Let this cycle run its course. When the market climbs back up (it will!), you can consider whether you want to change the way you invest. And resist staying totally out of stocks. They’re still worth it, for that part of your savings that you won’t need for another 10 or 20 years.

Also of interest: Common retirement planning mistakes.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.