Planning for Retirement

One of the quiet revolutions of the second half of the 20th century was the dramatic increase in the health and life expectancy of retired people. As a result, conventional ideas about retirement have changed. Robust retirees are leading longer, far more active—and more expensive—lives.

People retiring in the near future will need more financial resources, and these resources will have to last longer. Most financial advisors say you’ll need about 70 percent of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. If you have average earnings, your Social Security retirement benefits will replace only about 40 percent. But some general principles of investment for retirement remain unchanged.

Virtually all financial advisers recommend that some portion of your retirement portfolio be invested in bonds.

Bonds represent money investors have lent to corporations or government entities. Generally, investors receive a fixed amount of interest regularly for the life of the bond. The face amount, or principal, is repaid at the end. This gives the investor a predictable flow of cash. This steady cash flow provides a needed element of stability to the retirement portfolio.

For people nearing retirement, the recommended percentage of bonds in a portfolio varies widely, ranging from as little as 15% to as much as 60%.

These percentages are influenced by several factors:

• How many years you have until retirement.
• How dependent you are on your investments for retirement income.
• How comfortable you are with investment risks.
• And whether you still need to accumulate money for expenses such as your children’s education or a new home.

If you are looking to retire in 20 years, you are likely still accumulating your nest egg. Since you probably still need to build your assets, you can take a fairly aggressive investment stance. There’s plenty of time to ride out the ups and downs of the stock market—within your own comfort zone. If the stock market makes you nervous, a mix of stocks and bonds may be appropriate.

If, on the other hand, you’re just a few years from retirement, or have already retired, you need more protection against the possibility of a sharp stock market decline. A greater proportion of fixed-income securities makes sense.

In both instances, people likely to be in high tax brackets after retirement may prefer to hold a high proportion of municipal bonds, which are generally exempt from federal tax and sometimes from state and local taxes as well.

The message here is that bonds can be used cautiously or aggressively in any portfolio. Regardless of the investment style, though, bonds have a definite place in a retirement nest egg.

A good starting point is a survey of your resources. To get an estimate of the amount of money you will get each month from Social Security when you retire, you can get in touch with the Social Security Administration at its Web site, or by phone at 1-800-772-1213 from 7 a.m to 7 p.m. Your employer’s human resources department can supply or get for you an estimate of your monthly income from your retirement plan. Total the two numbers and compare them with an estimate of your monthly post-retirement expenses. If the total is less than your monthly expenses, your investments will have to provide the balance.

Below are some questions about the sort of plan that might be right for you:

How many years until you retire?

• 10 years or more.
• Less than 10 years but more than five.
• Five years or less.

How many dependents will you have upon retirement?

• None.
• Just 1.
• More than one.

How dependent will you be on your investments for retirement income?

• They will have to provide a quarter or less.
• They will have to provide more than a quarter but less than half.
• They will have to provide half or more of my retirement income.

How willing are you to take risks in order to achieve your investment goals?

• Whatever risk is necessary to achieve goals.
• Some risk.
• As little risk as possible.

How you answer these questions could suggest different investment approaches ranging from a more aggressive strategy, using a greater percentage of equities and high-yield bonds, to a more conservative strategy, using a greater percentage of bonds than equities, or something in between.

This simple quiz is intended only to get you thinking about your possible investment strategy for retirement and is by no means definitive or intended to serve as investment advice. Many other evaluation matrixes are available from financial advisers and companies that offer specific investment products. Several are available on the Internet. A search for “retirement asset allocation” will lead you to several sites that offer evaluations.

The first step in devising an investment strategy for retirement is to survey your resources and needs, as discussed above. After you’ve assembled the necessary information, you should consult with a financial professional about how your assets should be allocated to best meet your goals, consistent with your perception of risk. You may find that your risk tolerance will increase as you acquire a better understanding of the relationship between risk and reward. But no matter what your needs and your risk perception may be, bonds have a definite place in your portfolio.