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Saving & Investing
by Carole Fleck, AARP Bulletin, - April 8, 2008
Stocks are tumbling. Home values are plunging. Consumer prices are rising. Family budgets and savings plans are shrinking.
As Americans confront an economy in turmoil, financial planners say older investors should concentrate on preserving their retirement nest egg and reducing volatility in their portfolio.
And the most important message, say financial planners: Don't panic. Don't do anything drastic.
To weather the downturn, the AARP Bulletin Today asked five financial experts for their advice for (1) boomers in their 50s with a decade or more remaining in the workforce, (2) workers nearing retirement and (3) retirees living on a fixed income. Though the advisers’ views vary, they all agree that diversified holdings and a solid financial plan—savings, pensions and Social Security—are crucial for a comfortable retirement. Here are some tips tailored for you:
If you’re in your 50s …
Despite the economic downturn, don’t make significant changes to your 401(k) contributions, investment allocations or savings plans.
“Recessions tend to last six months or less, so if your retirement is five to 10 years away, the icebergs will be well in your past,” says Ric Edelman, a Fairfax, Va., financial adviser, radio show host and author of six books on personal finance, including his latest, The Lies About Money.
Because of market volatility, he says, the best strategy is to buy and hold. “Make sure your portfolio is highly diversified. You should be spreading your money around extensively in U.S. stocks, international stocks, growth and value stocks, little and big companies.
“The falling dollar, inflation—different investments will act differently in each scenario,” he says. “The idea is to spread your risk so extensively that no one problem will do much damage.”
Maximize your 401(k) contributions and avoid excessive transactions—the fees for buying and selling can add up.
Jonathan Scheid, an executive vice president with the financial services firm Bellatore, in San Jose, Calif., says now is the time to take advantage of buying opportunities when financial markets are down and stocks are selling at a discount. “Your 401(k) contributions buy more shares of stocks” when prices are lower, says Scheid, “so when the markets come back, you’ll see a bigger benefit.”
Jim Schlagheck, a wealth management specialist and author of Cash-Rich Retirement, advises everyone—regardless of age—to invest more for income than for growth. “People should invest for interest, dividends and rent income.”
Schlagheck says a stock that pays dividends gives you a double advantage: “It increases more in value when the markets go up and decreases less in value when the markets come down.”
He also suggests investing in the kind of real estate investment trusts (REITs) that invest in properties that pay rent because “that rent is passed along to the investor” in dividends.
If you’re in your 60s…
A dwindling nest egg is more worrisome when you’re closing in on retirement because you have fewer years to recoup losses. If you have not reached your retirement goals (go to AARP’s retirement calculator), it may be wise for you to delay retiring for a few years or, if that’s not possible, reduce your expenses.
To figure out what your portfolio should look like, consider this formula proposed by Scheid. Start with 100 percent, subtract your age (60, for example) and the remainder (40 percent) is what your stock allocation should be. The remaining 60 percent should be in bonds or money markets.
With increased longevity—20 or more years in retirement—and faltering interest rates for bonds and other similar investments, some experts suggest a portfolio heavier in equities to build up funds that will last longer.
Charles Rotblut, a senior market analyst for Chicago-based investment research firm Zacks, maintains that older adults should retain up to 50 percent of their portfolio in stocks to outpace inflation and to stretch over decades.
“If you don’t need the cash right now and you want your portfolio to last 10, 20 or more years, you need to keep a certain portion of your portfolio in stocks so that you continue experiencing growth,” Rotblut says.
When it comes to bonds, he urges investors to buy municipal and highly rated corporate bonds, which provide a higher yield than U.S. Treasuries and are less likely to fluctuate in value compared with stocks.
Scheid recommends a bond investment that matures in seven years or less for its lower volatility, compared with long-term bonds.
Schlagheck, who recently coproduced a PBS documentary “Retirement Revolution,” points out that not all bond funds are low-risk: “You’ve got to do your homework,” he says.
“Today, you could be heavily invested in a bond fund, but if you don’t pay attention to what’s in it, you may be sitting on mortgage-backed securities that have dubious value. And that isn’t low-risk whatsoever,” he says.
If you’re 70-plus
Most financial planners agree that the older you are, the more conservative you need to be, especially if you’re retired and living on a fixed income. Just how conservative is where they differ.
Karen Schaeffer, president of Schaeffer Financial of Rockville, Md., says conservative investments remain the safest route.
“Cash is king for older retirees in a recession—CDs, money market funds, U.S. Treasury bills,” she says. “You’re just trying to protect your principal. The older you are, the more it makes sense to be in cash.”
Schlagheck suggests this ratio of investments: at least 10 percent in U.S. Treasury inflation-protected securities (TIPS), but only in 401(k)s and IRAs or annuities; 50 percent dividend-paying equities; 25 percent income-producing bond funds; 10 to 15 percent rent-producing REITs; and 5 percent in gold and precious metal funds. (He emphasizes that such a recommendation is based on past results but is no guarantee.)
He also says 50 percent of stock investments should be in non-U.S. funds, to capitalize on the younger demographics of India, China, Brazil and Indonesia. “Many countries have teenagers and young adults who will soon be looking for housing, transportation, energy, natural resources and investment options,” he says. “That should translate into attractive investment opportunities for us all.”
Are you delaying your retirement because of the economic downturn? Were you depending on the value of your home to help you retire? Has your 401(k) dropped significantly, keeping you on the job? Or are you working just to cover health insurance? E-mail us your story at firstname.lastname@example.org. Please include your name, address and contact information.
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