Kiplinger Today

Making Your Money Last

Retirees and the Shrinking Nest Egg

EDITOR'S NOTE: This article was originally published in the November 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.

You made all the right moves. Your portfolio was diversified. Your assets were appropriately allocated for your age. You maxed out on contributions to your retirement plan. Now you're watching your incredible shrinking nest egg with horror.

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If you've been tempted to flee the rocky stock market, that's understandable. But financial experts we interviewed were nearly unanimous on one thing: Retirees and soon-to-be retirees need to stay invested. Lighten up, maybe, but don't bail out completely.

"The problem with getting out of stocks now is that you won't know when to get back in," says James Swanson, chief investment strategist for MFS Investment Management in Boston. "By the time the market goes up, you could lock in your losses and miss out on the upswing."


And stocks are still considered the best investment for the long haul. The average 70-year-old retiree needs a savings plan that can finance another 20 years or more of retirement. Cash and bonds alone will not beat inflation over time.

If the past is prologue, there's more than a glimmer of hope. The 15 bear markets since 1957 lasted, on average, ten months and knocked the market down an average of 29.4%. In the same period, there were also 15 bull markets, says Swanson, lasting an average of 30 months with average gains of 112.5%.

Of course, we can't predict fluctuations in this particular market, so it's best to stick with things we can control. A bear market is a good time to take a hard look at your portfolio, especially if your projections were based on stocks' historic rates of return of 10% annualized, an unlikely prospect for the next decade. If you are not relying on the advice of an investment consultant, perhaps it's time to find one.

On the plus side, stocks aren't expensive. If you have dogs in your portfolio that you've been meaning to dump, go ahead. But then buy a bargain in the same asset class.

A crisis can be a painful test of your risk tolerance. As a general rule, 30% to 60% of a retiree's portfolio should be invested in stocks. But if a 40% exposure is making you panicky, trim it back some, if the market hasn't already done enough trimming for you. "If you're tossing and turning, you probably should sell something so you can sleep at night," says Sri Reddy, vice-president and head of income strategies for ING U.S. Wealth Management.

That's what Andrew Ames decided to do, at least for a while. Ames, 68, who lives with his wife, Delores, 66, in Burlingame, Cal., retired in 2006 as the head of an executive search firm. Conservative investors, the Ameses kept about 25% of retirement savings in stocks, with the rest in bonds and cash.

As the market started plummeting in early October, Ames called Kevin Dorwin, his financial adviser at Bingham Osborn & Scarborough in San Francisco, who told his client to stay the course. "They did a fair amount of hand-holding," Ames says.

Still, Ames decided to scale back his stock holdings to about 12%, with plans to return to 25% at some point. Why not bail out completely? "If we went to all cash, there would be no opportunity to capitalize on any uptick in the marketplace," he says.

The couple is postponing major renovations to their home, but not a planned trip to Paris. "Given the losses we have incurred, what we will spend in Paris is nothing," he says.

Until the bulls arrive, you're best off drawing on a cash reserve for living expenses, rather than selling stocks while they're declining or cashing out long-term bonds. Rande Spiegelman, vice-president of financial planning for Charles Schwab & Co., suggests having five years' worth of spending money in safe instruments. The first year should be in federally insured cash deposits and in money-market mutual funds, he says. The rest should be in short-term bonds and longer-term certificates of deposit.

If you're still working, sock away part of your paycheck into a liquid account. Retirees can replenish their cash cache by sweeping mutual fund distributions into a money-market fund instead of having them automatically reinvested.

A home-equity line of credit can serve as an emergency cash source. With falling home values, it's harder to get a home-equity line of credit, and many banks are suspending or reducing such credit. But if you have plenty of equity in your house, you can make a case to your lender or to a community bank that knows local housing-market conditions.

If you have a line of credit and a big expense coming up, consider taking the money out and putting it in a safe investment, says John Ulzheimer, president of consumer education for, which offers consumer-credit information. He notes, however, that the debt will show up on your credit report.

Safe places for cash. Banks are safer than ever, now that Congress has hiked the limit for federal deposit insurance to $250,000 per account, from $100,000, at least through the end of 2009.

Look for good deals on certificates of deposit, especially at smaller community banks, credit unions and online banks. You can compare rates at

For the first time, the government is also insuring some money-market mutual funds. A temporary program promises investors that if a fund "breaks the buck" -- that is, if its net asset value falls below $1 per share -- the government will make up the difference. This promise applies only to the number of shares owned on September 19. Just about every fund has joined the program, which ends in April unless the Treasury secretary extends coverage.


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