Week of 3.6.09
Retirement: You Asked, She AnsweredFor our show "Retirement at Risk," many of you wrote in your questions about how to plan for your retirement during these tough economic times.
Read financial guru Manisha Thakor's answers below:
Question: I am within five years of normal retirement. How can we maintain a diversified portfolio after we've seen our 401(k) savings plan lose so much of its value? Is there a "safe ground" where I can put my savings to stop the hemorrhaging?
Manisha Thakor (MT): One of the fundamental premises of investing is that in exchange for taking on risk (by buying stocks or bonds) you have the opportunity—but not the guarantee—- of benefiting from a reward (your money growing). Over the long run (10+ years) more often than not that risk has generated positive returns. But here's the catch: That's not true in every ten year period. One way to protect yourself is to take any money that you know you are going to have to spend in the next one to five years and keep that in cash or cash equivalents. Whether you keep cash at the lower or higher end of that spectrum will depend upon your "sleep well at night factor." Then with your remaining retirement funds you can use a low cost balanced fund (consisting of a mix between stocks and bonds) to maintain some upside exposure for the money you won't be touching in the earliest stages of your retirement. This puts one leg on "solid ground" while keeping the other leg "in the game," so to speak.
Question: I have money in a TIAA-CREF fund that has lost over one-third of its value this year. Would I be wise to take what is left and put it into an IRA? If so, should it be at Roth?
MT: As painful as a one-third loss in value is, that figure is actually right in line with the broader markets. From what you say, it sounds like you are investing in a TIAA-CREF mutual fund that is in all stocks. Your primary decision at this point is whether or not you want to continue to be in all stocks. The answer depends upon your age. If you are in your 20s, 30s, or 40s, and this is money for your retirement, this would not be unduly aggressive. If you are in your 50s, 60s or beyond, however, you would likely want to have a more balanced approach, meaning owning stocks and bonds. From what you write, I am guessing this TIAA-CREF fund is in a 403b retirement plan. Rolling those funds over into a Roth IRA (assuming you can even do so as it depends on your employment status) won't change the underlying question: What should your money be invested in? Remember that investing in a 403b or IRA is like picking a restaurant for dinner. Once you get there you still have to order wisely off the menu. Your issue is not which restaurant to go to but what you should order off the menu. You can call TIAA-CREF to talk to them about your options, and they also have an informative website. Check out the education and support tab.
Question: How do you start over when you have no more 401K and no pension when your energy is waning and old age illnesses are emerging?
MT: You start over... slowly and gently. My heart goes out to you. You are not alone, and this is not a fun situation to be in. The bad news is that you will either have to work longer, spend less, or do a combination of both. The good news is that as awful as this situation is, there can be some bright spots, if you think creatively. For instance, do you have family members or friends that you can live with in exchange for helping provide childcare or elder care? Are there expenses in your life that aren't bringing you joy (like a home or other possessions that are dragging you down with upkeep)? Might you consider moving to a lower-cost part of the country? There are no easy answers, but knowing you are not alone can help take some of the sting off. The AARP website is a great place to get insight and information from experts and others in your position.
Question: My friends and I are in our late 70s and 80s. Some of us have sold our homes and moved into retirement homes which required large entry fees and monthly fees. Now our income from the CDs, etc, is falling. Where should we go from here?
MT: First, congratulate yourself that you were in CDs and not stocks. And I mean that from the bottom of my heart. As you approach your late 70s and 80s, you don't want to be putting your hard-earned principal at risk. Right now, interest rates are very, very low as the government struggles to jumpstart the economy. Rates are so low, in fact, that there's almost no room to go lower. That means over time—which I would define as over the next one to three years—the next move is likely to be up. The only way you can get more income off "stable value" assets like CDs is to take on more risk, something you don't want to do at this stage in your life. So your best strategy is to hunker down, keep your exposure "short" (meaning invest in 6 month or 1 year CDs) and cut your spending to the bone. Rates should eventually rise, and by keeping your money in shorter-term CDs you will have the chance to roll those maturing CDs into newer ones at higher rates. You can keep tabs on rate movements at BankRate.
Question: I've lost just under $100,000 in the last 14 months. I'm 69 years old, live alone, and cannot work because of back problems. I keep reading and hearing on TV that if you're in your seventies, you should be in treasuries and cash. Am I a total fool to still be hanging on to my portfolio, which is all in mutual funds, sweating bullets over my monthly statements? Is it better to get out with $100 and get back in with that intact than it is to ride the surge up with $5?
MT: The rough rule of thumb is that the maximum amount of your investments that you should have in stocks is 100 minus your age. So if you are 70 years old, you'd want no more than 30% of your total assets in stocks (100-70 = 30). Given you are unable to work, you would want to err on the side of being more conservative. What you need to find out is how your mutual funds are invested. Are they in all stocks (bad) or in a combination of stocks and bonds (better)? You can call your fund company and ask them. While you're at it, have them send you a prospectus so you can get a better understanding of your investments. After you are armed with this knowledge you can decide if you need to make a change.
Question: I'm 42 and have $60,000 saved in my 401k. I have no debt. I also have saved $150,000 in cash that I want to invest for the future. I will not need this money for ten years at least. What should I do?
MT: Congratulations on having some sizable savings outside of your retirement accounts. Not many people do. You have already identified the most important question which is when do you need to spend this money. For money that you do not need to spend for at least ten years, a balanced mix of stocks and bonds—such as those you can receive by investing in a low cost target-date retirement fund—can make sense. You can also replicate that by investing in a mix of low cost stock and low cost bond index funds. You sound like an ideal candidate to visit with an hourly fee-based financial planner. You can find one in your area through the National Association of Personal Financial Advisors.
Question: My retirement money is in Vanguard mutual funds. Like everyone, I've lost a lot. I am unemployed, and trying to figure out if I should withdraw the amount in equities and stick it into short term CDs. I have a daughter going college in less than two years. My plan has always been to sell my house, using part for her education and part for my new (and less nice) house. I have enough in cash to last me two years, so should I stay the course in my equity funds?
MT: That is the million-dollar question. The fact that you have enough cash to last two years puts you in a much better position than most. What we do know is that the past ten years have been one of the worst ten-year stretches that we've seen in the stock market ever. We also know that by most traditional valuation measures the stock market no longer appears to be overvalued. We also know that over the long run (defined as ten plus years) stocks tend to appreciate in line with the underlying business results of the companies they represent. If you think the U.S. and the global economy will ultimately rebound, you would likely want to maintain some exposure to stocks. That's because stocks tend to "anticipate" the economic rebound and move up before the economy actually starts to improve. However, you also need to sleep at night while this is all playing out, and a cash cushion is the key. One compromise you might consider is increasing your cash cushion to three or four years and keep the remaining funds invested. This way you have some exposure to the upside but if the bottom is further off than people think, you also have some protection.
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