Make It Last

RETIREMENT | Diversification is the key to PROTECT YOUR NEST EGG. By Mary Beth Franklin

Over the past year Tony and Kay Trischman of Laguna Woods, Cal., have watched their retirement portfolio shrivel. Once
worth more than $1 million, their nest egg has shrunk by more than 30%. While they both collect social security benefits, neither Tony, a retired chemical engineer, nor Kay, a former teacher, has a traditional pension. They both rolled retirement savings from previous employers into IRAs and signed up for the T. Rowe Price Retirement Income Manager program (www.troweprice.com/ric) three years ago to track their investments and manage withdrawals.
      The Trischmans, both in their sixties, chose not to accept the Baltimore-based investment firm’s recommendation to invest about 60% of their assets in stocks and 40% in bonds and cash. Tony thought that allocation was too conservative. Instead, he kept the bulk of the couple’s money in stock mutual funds, with a heavy emphasis on the science-and-technology sector. Now the Trischmans are rethinking their strategy.
      "It probably would have been smarter if I had done what they suggested," says Tony. "But then again the account probably wouldn’t have grown as much as it did. I just wish we had gotten out sooner. I think I’ll go back to a more conservative approach. My wife will feel more comfortable, and we won’t have to watch it all the time."
     
      Three-year cushion. While the Trischmans have suffered a significant loss, their day-to-day lifestyle has not been affected so far because they kept about 10% of their assets in a money-market fund. That’s enough, when added to their social security benefits, to fund about three years of living expenses. And it’s in line with what many financial advisers suggest for retirees so they are not forced to sell stocks in a down market.
      "If clients have the money, we commonly recommend that they park three years’ worth of living expenses--taxes, trips, vacations, gifts to the kids--in a money-market fund," says Randolph Shine, a co-founder of Shine Financial, in Deerfield Beach, Fla. "Then we allocate the investment side of the portfolio in stock funds, real estate investment trusts and bonds for the long term." Retirees with pensions or annuities that cover some or all of their normal expenses need less in a money fund to cover the gap.
      As bonds or CDs mature, you can use some of the money to replenish the money-market account and maintain the three-year cushion. Keep the rest invested for the long term. "Be patient and stay diversified," says Sharon Rich, a financial planner with Womoney, in Belmont, Mass. But that doesn’t mean stay stagnant. You must carefully monitor your portfolio and rebalance investments if you find that your exposure to stocks is too high.
      What if market losses are making an impact on your budget? There are no easy choices. Retirees who find themselves in a cash-flow squeeze must either cut spending or increase income. For example, some retirees are carrying too much life insurance. If your mortgage is paid off and you don’t have a taxable estate, you might be able to reduce or eliminate your life insurance premiums.
      Or find another source of income. Many retirees are working part-time, not only to stay busy but to supplement their income or pay for discretionary costs such as travel. 
      --Reporter: CHRISTINE PULFREY