"Get Your Finances Ready for Retirement"-Reducing Risk in Your Retirement Portfolio
Monday, July 28, 2008JEFF YASTINE: For baby-boomers, amassing a nest egg for retirement, that's just the beginning. To make sure those funds last through retirement, the next step is often a plan to grow the nest egg through investments. But of course investing always involves risk. And as we continue our series "Get Your Finances Ready for Retirement," Connie Hicks looks at ways to minimize that risk in your retirement portfolio.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Ivan and Alfrieda Reent worked hard their entire adult lives on their Iowa farm. So a few years ago they decided to retire, meaning less work, more travel.
ALFRIEDA REENTS, RETIREE: I'm looking forward to the trip to Kentucky.
HICKS: When they sold their land, they were advised to put the proceeds into investments that happened to have a high degree of risk. The result:
REENTS: We had lost some money and other investments weren't doing as well as we thought investments should be doing.
HICKS: So the couple turned to Jerry Egermier, a certified financial planner in Omaha. He thought the Reents had been talked into questionable investments for a retirement portfolio. One was an IPO, the initial public offering of a company's stock.
JERRY EGERMIER, EGERMIER RETIREMENT & FINANCIAL SERVICES: Generally we wouldn't normally recommend to do that because of the fact that an initial public offering many times is of a higher risk nature. You're concentrated into one investment and you either live or die by what happens with that company and unfortunately in this particular case, the company failed and all of that money was lost.
HICKS: Many retirees regard investing in any stocks as too risky, but while an IPO or a single stock could be something of a gamble, investing in a diversified basket of stocks is not the same thing as putting your money in a slot machine. In fact, history proves stocks as a whole tend to do better than other investments over the long term. But the stock market can also go down for extended periods and Moshe Milevsky, an expert on financial risk management, says that poses a problem for many retirees.
MOSHE MILEVSKY, PH.D., FINANCE PROFESSOR, YORK UNIVERSITY, TORONTO: When you're accumulating wealth, the bull markets and the bear markets tend to even out. In the long run you end up ahead. When you're in retirement, you don't have time for the bull market to cancel out the bear market and anybody that retired in the last five or 10 years is experiencing this.
HICKS: So how can you avoid the risk of having to sell stocks just when prices are plummeting? Wealth manager Harold Evensky deals with this situation by keeping two years of a client's expenses in cash at all times along with three years of expenses in short-term bonds.
HAROLD EVENSKY, PRES., EVENSKY & KATZ WEALTH MANAGEMENT: That's where are five year comes from -- between the two year that we carve out in cash and the short end of our bond portfolio, our clients can weather a five- year bear market in stocks and bonds and never be forced to sell something at a loss or certainly not a substantive loss.
HICKS: Besides investment risk, retirees face longevity risk: the possibility of outliving your money and inflation risk, which happens when you don't plan for the impact of rising prices. Financial planner Ergemier says keeping stocks out of a retiree's portfolio can increase those risks.
EGERMIER: There's a lot of different types of risks out there. Inflation risk is one of the biggest and that's obviously where your purchasing power is going -- you're going to have less and less each year, so you have to be invested in some things that are going to grow in value, such as stocks, mutual funds and different types of growth investments and so you can't be too conservative.
HICKS: The Reents periodically review their portfolio with Ergemeier to be sure the risks and returns are acceptable. That lets Ivan and Alfreida do just what they planned to do - relax. Connie Hicks, NIGHTLY BUSINESS REPORT.
