This month, our “Get Your Finances Ready for Retirement” series moves on to subject of how to manage your investment portfolio when you retire. After much research, I’ve concluded that this is not something that you want to learn through the “trial and error” method.

Here’s why: in your pre-retirement investing days, perhaps you could afford to invest like Jim Cramer. If you went for the home run and struck out instead--well, it wasn’t the end of the world, since it probably wasn’t money you needed right away…and you had enough time to make it back. But now that you’re depending on your portfolio for a big part of your income, you don’t have much room for error!

So reducing risk is among the first things you need to do in transitioning your portfolio to in-retirement status. On July 28, Connie Hicks will report on an Iowa farm couple that was convinced to put some retirement funds into an IPO (the Initial Public Offering of a company’s stock). As securities with no track record, IPOs are inherently high-risk. There is general agreement that this type of investment is unsuitable for most retiree portfolios--and in fact, the Iowa couple ended up losing thousands of dollars through their IPO stock.

On the other hand, trying to be too conservative in your retirement investing can also hurt you. A lot of people think they can simply put their dollars into a T-Bond or a Bank CD and sit back. The problem is: if you don’t earn enough in your portfolio to keep up with inflation, your purchasing power will go down over time. That’s why most of the financial advisors we consulted say it’s necessary for retirees to have investments with potential for growth. As we’ll show in Joe Collum’s report on July 14, that generally means keeping a chunk in a diversified group of stocks (equities) or stock mutual funds. (The exact amount is subject to debate and may vary with an individual’s situation. For more on this issue, see the interview excerpts with noted Wealth Manager Harold Evensky that we’ve posted on this website).

I realize that in a market like the one we’re in now, equating stocks with growth may seem a little crazy (all right...VERY crazy). But we checked with the unquestioned experts on investment return--Ibbotson Associates--and it’s a fact: history shows that stocks are still in the top spot when it comes to making money over the long term …with the annual return of the S&P 500 averaging 10.3% from 1926-2007). The problem is that the market doesn’t go up in a straight line. (If you’ve been invested over the past decade, you’re painfully aware of that: from 1998 to the present, the S&P 500 has been up an average of less than 1% a year!) So as a retiree, how can you keep from having to sell off your stocks/stock funds at the worst time possible…in a Bear Market?

There’s no total solution, but Harold Evensky has one approach that’s worth noting. He puts five years’ worth of his clients’ assets into a combination of cash and short-term bonds, so they have a five year cushion before they have to dip into their stock holdings for spending money. The hope is that the market will go up during that interval, making it possible to sell off then and replenish the retiree’s account before the next market downturn. (Harold discusses this at length in another posting here).

The bottom line: when you’re investing in retirement, it’s a very different ballgame.
To learn the ground rules, catch our July installments of “Get Your Finances Ready for Retirement.”