In This Chapter

• Investing your money wisely

• Knowing how much you can withdraw and when

• Coming up with a budget

• Breaking down expenses into needs and wants

• Deciding whether to go back to work

Many of the major stresses people face as they near retirement are all about money: Will I have enough to retire? How much do I need? How do I make sure my money lasts as long as I do? Given the current economic climate — where your home and stocks may not be worth as much as you anticipated — the stress is not unfounded. In this chapter, we fill you in on the big questions you need to ask yourself, so that you can enjoy your retirement instead of worrying about it.

Investing the Money You Have

By the time you reach retirement, the goal is to have a sizeable nest egg that you can tap as you enjoy your retirement years. Investing your nest egg properly, whatever size you have, is critical to extending its life throughout your life span. In this section, we show you how.

Allocating your investments

Many people think that the most important aspect of managing a portfolio is picking the right stocks, bonds, and mutual funds. They're wrong. The individual stocks, bonds, or mutual funds account for only 5 percent to 10 percent of a portfolio's success. More than 90 percent of that success can be credited to the way you allocate your assets among stocks, bonds, and money-market instruments. Proper asset allocation involves five key factors:

• Your investment goal: Why are you saving? That's probably an easy answer — to have enough money in retirement. But you may be thinking you want to start a business or help your grandchildren go to college.

• Your time horizon: How long will you have until you're going to need the money? When you need the money impacts how you should invest it. (See Changing your strategies as you age, later in this chapter.)

• Your risk tolerance: If market fluctuations keep you up at night, you have a minimal understanding of investing, or you fear losing more than 25 percent of your assets in a few weeks, you're likely a conservative investor. Keep some stocks in your portfolio to insure that your funds grow throughout your retirement, but consider picking a balanced mutual fund or a life-cycle mutual fund that manages the risk for you without taking any great swings.

  If you're comfortable with the ups and downs of the market, you know the ins and outs of investing, and can accept significant short-term losses in a down market, you're likely an aggressive investor, willing to take more risk with your portfolio to grow your money.

• Your financial resources: How much do you have in your portfolio? How much you have will impact how well you can diversify your portfolio. Basically, it's not wise to put more than 4 percent of your portfolio in any one investment, such as an individual stock or bond. If you don't have enough to diversify properly, use mutual funds that are already well diversified.

• Your investment mix: How well is your portfolio balanced among cash, stocks, and bonds? The way you mix the three key elements will impact the return you can get. A portfolio invested mostly in cash vehicles (money-market funds and certificates of deposit) will have the lowest return, but it's the safest if your primary concern is loss of principal and you're not worried about taxes or inflation eating away your returns. A portfolio invested only in stocks will have the highest return but is the riskiest. By properly allocating those components, you can reduce risk and still grow your money.

Changing your strategies as you age

Your primary goal is to have the cash you need when you need it without having to take a loss on any part of your portfolio. We can't guarantee that you'll never take a loss — everyone makes a mistake in choosing investment opportunities sometimes. But following the general rule of moving money to cash one to two years before needing it minimizes your risk of taking a loss.

The key thing you want to avoid is being forced to sell a stock or bond in a losing position just because you need the cash. Carefully managing your investment mix as you age helps you avoid this type of crisis.

Follow these steps while managing your portfolio in retirement to minimize your risk of taking a loss:

• Shift some stocks to bonds.

  It's best to shift stock holdings to bonds about three to five years before you need the money. As you age, it's good to be sure that your portfolio balance includes bonds for the money you think you'll need in three to five years. That way, you can count on a higher level of growth than cash accounts offer, but your principal is less likely to be at risk.

  You can, of course, convert your stock immediately to cash holdings and not touch your bond holdings if the stock market is up and the bond market is down.

• Shift some bonds to a cash vehicle.

  Convert your bond holdings from Step 1 into cash when you think you're one or two years away from needing the money. Giving yourself that much time will enable you to convert the bonds at a good time, when you'll get the best return on your bonds.

  Your time horizon for needing the money is a critical factor in deciding where to put your funds. You don't want to be caught in a down market when you need to sell stocks or bonds. You can avoid being caught by shifting money that you know you'll need in the next two years into a cash vehicle, such as a money-market fund or a certificate of deposit. You won't earn much on the money, but your principal will be safe.

Back to Top