repost­ed from:
by: Andrea Murad
April 12, 2013

The retire­ment equa­tion isn’t look­ing good for baby boomers right now.

“Boomers have weath­ered many chal­lenges in a short peri­od of time: the finan­cial cri­sis, high unem­ploy­ment, ris­ing med­ical costs and sup­port­ing aging par­ents and adult chil­dren,” says Pat O’Connell, exec­u­tive vice pres­i­dent of the Ameriprise Advi­sor Group. “These events have squeezed their finances and made it dif­fi­cult to save.”

Only 42% of work­ers old­er than 55 have saved more than $100,000 for retire­ment, accord­ing to Employ­ee Ben­e­fit Research Institute’s 2013 Retire­ment Con­fi­dence Sur­vey. We are also liv­ing longer–with the aver­age life expectan­cy into the ear­ly 80s, which means larg­er nest eggs to con­tin­ue to make ends meet. 

“Peo­ple have to fund longer retire­ments with less fixed income sources like pen­sions, high health­care costs and a stock mar­ket that isn’t per­form­ing like it once did—it’s a per­fect storm of sorts,” says Scott Hal­li­well, cer­ti­fied finan­cial plan­ner at USAA.

While fixed income yields are low com­pared to his­tor­i­cal stan­dards, peo­ple are tak­ing on more risk in their port­fo­lios to help increase their sav­ings. “That’s an OK thing to do if you under­stand the risk you’re tak­ing but often­times, peo­ple don’t,” says Hal­li­well. As a gen­er­al rule of thumb, invest­ments with greater return poten­tial also have greater loss poten­tial.

The recent strength on Wall Street has many peo­ple buy­ing equi­ties to make up for lost time, says Dan Keady, direc­tor of finan­cial plan­ning at TIAA-CREF, but it’s impor­tant to have a plan and to know your goals and time­frames first.

Here are expert tips to help mod­er­ate port­fo­lio risk while still receiv­ing sol­id returns.

Have a Long-Term Per­spec­tive

Since you’ll lose pur­chas­ing pow­er if your invest­ments earn 1% or 2% per year, Mack­ey McNeill, CEO of Mack­ey Advi­sors, sug­gests know­ing the fun­da­ments of stock index­es and how they per­form over dif­fer­ent time peri­ods. A stock with many ups and downs with­in a year could trend up in the long-term, so be sure to take a longer approach. “There aren’t that many 10-year neg­a­tive return peri­ods,” says McNeill.

Once in retire­ment, Robert Stam­mers, direc­tor of Investor Edu­ca­tion for the CFA Insti­tute, rec­om­mends going into cap­i­tal preser­va­tion mode and reduc­ing your stakes in stocks to avoid los­ing mon­ey in wild mar­ket swings. “You have to be care­ful to not lose cap­i­tal because you have to live on it.”

Despite the bull­ish mar­ket, O’Connell says we’re in the most dif­fi­cult envi­ron­ment to gen­er­ate income. CDs and bonds with record-low rates mean that retirees have to take more risk to gen­er­ate income by choos­ing invest­ments like pre­ferred stocks, div­i­dend pay­ing stocks and REITS.

“Always run the num­bers in the finan­cial plan to help you make a deci­sion,” says McNeill. Mod­el­ing based on an all-stock port­fo­lio has the risk of short-term volatil­i­ty and long-term pur­chas­ing pow­er, or infla­tion, rather than what’s hap­pen­ing in the mar­ket today.

Be Diverse to Coun­ter­act Volatil­i­ty

You don’t have to guess where the mar­kets are going if you have a diver­si­fied port­fo­lio, says Keady. “If somebody’s going to jump in and out [of the mar­ket], they prob­a­bly shouldn’t invest.” The mon­ey that you invest should be in for the long-term to weath­er the volatil­i­ty.

“Think about the seasons—winter is a reces­sion and sum­mer is an expan­sion,” says McNeill. Putting your port­fo­lio in a vari­ety of asset class­es like stocks, real estate or com­modi­ties can help smooth out the volatil­i­ty. Com­modi­ties can be more volatile than the S&P but if you put both in your port­fo­lio, you have less volatil­i­ty over­all, she says.

“Dif­fer­ent assets class­es don’t work the same and you can use that dif­fer­ence to your advan­tage and have less risk and volatil­i­ty by mix­ing asset class­es,” says McNeill.

As you look to diver­si­fy, McNeill sug­gests think­ing about invest­ing a por­tion of your port­fo­lio in com­modi­ties, real estate, emerg­ing mar­kets and small caps through an ETF. Every quar­ter, rebal­ance your port­fo­lio to your set allo­ca­tion amounts,” she sug­gest. “If you’re going to own 5% emerg­ing mar­kets and they go up to 7%, you have to sell that 2%.”

Be Judi­cious About Risk

“Focus on the long-term peri­od of your retire­ment by diver­si­fy­ing your invest­ments to pro­duce income that keeps your risk pro­file inside your com­fort zone,” says O’Connell. Fig­ure out whether you need to take on more risk and don’t focus only on prin­ci­pal volatil­i­ty but also con­sid­er inter­est rate risk, infla­tion risk and longevi­ty risk.

If income is your pri­ma­ry goal, con­sid­er a port­fo­lio hav­ing short-term prin­ci­pal fluc­tu­a­tions. You won’t increase your over­all risk tol­er­ance if you focus on the long term and diver­si­fy invest­ments to pro­duce income.

Delay Social Secu­ri­ty

Instead of tak­ing on more risk in your port­fo­lio, delay­ing Social Secu­ri­ty may be a bet­ter option, says Keady. Hav­ing a source of life­time income will also help to mit­i­gate some infla­tion risk over­time. Con­sid­er tak­ing more out of your port­fo­lio or work­ing part-time so you can delay tak­ing Social Secu­ri­ty until age 70.

Pay Off Debts

“If you don’t have a mort­gage, it reduces the strain on our port­fo­lio,” says McNeill. Not hav­ing any debt increas­es the amount of mon­ey you have for dis­cre­tionary spend­ing. If nec­es­sary, con­sid­er part-time work to pay off your mort­gage soon­er. “If you don’t have enough mon­ey, think about dial­ing your life down,” she adds.

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