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Retirement realities changing investment strategies


Andrew Leckey

Andrew Leckey

Once you enter retirement, financial reality sets in. Retirees must cope with changing economic and market trends over a long period of time, often without the backstop that was once provided by tried-and-true pension plans.

The possibility of rising inflation is a big discussion point in 2011. In addition to the ready cash and fixed-rate investments that are so plentiful in the accounts of many retirees, there must also be room for stocks, stock mutual funds and exchange-traded funds.

With an increase in the life expectancy of Americans, the financial well-being of every individual in retirement rests heavily on his or her own decision making.

“Retirement doesn’t make you immune to economic and market issues,” said Eric Turloff, president of Turloff Financial Consulting in Bainbridge Island, Wash. “A common mistake is believing that something just can’t happen, such as real estate losing its value or your pension – if you have one – being less than 100 percent safe.”

He tells retired clients with pensions to build reserves to meet their needs in the event of a pension default. He directs them to “plan for the worst and pray for the best.” If the worst doesn’t happen, they can “take the money and go on a trip,” he said.

“We’re finished with the ‘Great Moderation,’ a 20-year period of declining interest rates that is now going to change,” predicted Tom Jacobs, lead adviser for the Motley Fool Special Ops in Marfa, Texas. “Retirees see that their cost-of-living increases for Social Security have been very low due to low inflation, but at some point, there will be higher inflation, and a lot of things will change.”

Retirees need more exposure to stocks for protection in an inflationary environment, Jacobs said. He contends that excessive focus on interest rates and bonds is a mistake because those investments that have been great for two decades are about to become terrible investments.

“Pensions have been going the way of the dodo bird, increasingly leaving people to fend for themselves in building their retirement portfolios,” warned Christine Benz, director of personal finance for Morningstar Inc. in Chicago. “It is a good thing that people are living longer, but it also means the time leading to the end date of a retirement portfolio is longer as well.”

Many people now live 25 to 30 years after retirement, so retirement money is needed for many more years, she said.

Retirees must have assets that produce income to meet their spending needs, as well as those that hedge against inflation, experts believe. One basic investment that Turloff recommends is Payden GNMA Adviser Fund (PYGWX), which invests about 80 percent of its assets in National Mortgage Association mortgage-backed securities. It has an AAA rating and a yield of more than 4 percent, he said.

In ETFs (that trade like stocks on an exchange), he recommends ProShares UltraShort 20+ Year US Treasury ETF (TBT) that provides twice the daily inverse return of the Barclays 20+ Year U.S. Treasury Index. Just remember, leverage that can double your money could also result in you losing twice as much, Turloff cautioned.

“Everyone in retirement must have six to 12 months of cash ready,” said Jacobs. “You don’t want to have to start selling off long-term investments to meet your short-term cash needs, as so many people did in 2008.”

In equities, those of large consumer companies with pricing power, such as PepsiCo Inc. (PEP), have the ability to pass along inflation price increases, he said. He also likes ExxonMobil Corp. (XOM) as an inflation-fighting investment and ConocoPhillips (COP) because it’s highly exposed to natural gas that is currently at a historic low price. The stock of both of those energy companies pay dividends as well, he added.

To hedge against inflation, retirees might consider putting five to 10 percent of their portfolio into the new AdvisorShares Active Bear ETF (HDGE), a reasonably priced, actively managed “bear side” ETF that bets against 20 to 50 stocks, said Jacobs. It could offer a hedge against the swings of the stock market, a consideration for retirees because they don’t have a 30-year horizon to make up for losses.

Bond yields, long considered the safe haven for retirees, have been very low, and the specter of rising rates does not bode well for them, said Benz. Higher-yielding new bonds always reduce the value of lower-yielding older bonds.

“The biggest mistake that investors make in retirement is not having the right asset allocation,” she said. “For example, they may not have enough equities to generate growth, or they may be chasing after what has recently been performing well.”

Fortunately, some ETFs feature broad baskets of securities that are outstanding building blocks in retiree portfolios, said Benz. For example, Vanguard Dividend Appreciation ETF (VIG), which is focused on blue-chip companies with a solid dividend history, offers a conservative and diversified low-cost building block.

Some financial planners use a “bucket” approach in retirement funds, she said.

One bucket for short-term needs would consist of two to five years of cash, such as money-market funds and certificates of deposit. That bucket would also include a very short-term bond fund such as T. Rowe Price Short-Term Bond Fund (PRWBX) for a little more yield, she said. Then a second bucket would include longer-term investments.

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.

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