5 New Investing Rules for Retirement

by Katy Marquardt Monday, January 12, 2009


Many of the old rules for retirement investing no longer apply. Facing longer life spans, increasing healthcare costs, and a market in crisis, retirees will need more growth in their portfolios during the coming years and decades. At the same time, they need the assurance that a 37 percent market drop--as we saw in 2008--won't completely devastate their remaining nest egg. A growing number of financial planners are rethinking the conventional wisdom. (Remember the old adage that you should subtract your age from 100, and devote that percentage of your portfolio to stocks?) Here are five new rules to consider:
Separate your investments into different pots. Often, investors in retirement lump all of their money together, with which they pursue one strategy, says Eric Bailey, managing principal of Captrust Advisers in Tampa. His firm, which works with pensions, endowments, and high net-worth individuals, takes an approach ripped straight from the institutional investors' playbook. Clients' money is separated into three categories: Short-term funds reside in very low-risk investments, such as high-quality bonds; intermediate-term money goes in a balanced mix of stocks and bonds--such as a 50-50 or 60-40 split; and long-term investments starting with five-year time horizons are heavier on stocks. "This way, you can take advantage of a market sell-off with your long-term investments and you'll avoid needing to liquidate investments when stocks are down," Bailey says.
Don't reach too far for yield. Cash may be king in this market, but decent yields are hard to find. Treasuries present the ultimate in safety, but the pay is meager: The one-year bill currently yields just 1.1 percent and the five-year 2.2 percent. Unfortunately, if you're looking for a bigger payout, you'll have to take on some risk. Says Oliver Tutt, managing director of Newport, R.I.-based Randall Financial Group: "You'll have to make a trade-off somewhere, particularly if you're dealing with large amounts of money." Stick with quality: If you're considering a bond fund, for example, be sure to look under the hood at its various holdings and review the fund's prospectus to see what types of bonds--and credit ratings--it targets. "Quality is always important, but more than ever it is now," says Bill Walsh, chief executive officer of Hennion & Walsh, an asset management firm based in Parsippany, N.J. "Know what you're buying."
Make it a muni. Government bonds are airtight when it comes to safety, but their yields are near all-time lows. As an alternative for retired investors in the upper tax brackets, municipal bonds are worth considering. With munis, investors get the benefit of tax-free income, less volatility than corporate bonds, and, theoretically, more safety. "Right now, there's more value in munis than almost every other area. But be sure you know the issuer," says Walsh. Among munis, he recommends high-grade, general-obligation bonds and essential-purpose bonds such as the sewer authority. "Stay away from things like nursing home bonds, which could go out of business," he says. Walsh prefers single-issue bonds over bond funds, which "will work, but you have to be careful," because there is no set maturity date, no set yield, and managers can sometimes buy outside of that asset class.
Go for dividends. It's a no-brainer that quality matters in a market like this. But how do you know if a stock is "quality"? Dividends are one indicator. That's because dividend income--which is essentially a portion of company profits paid out to shareholders--helps offset fluctuations in a stock's share price, creating a cushion during turbulent markets. "During trying times, dividend-paying stocks tend to do well," says Paul Alan Davis, portfolio manager of the Schwab Dividend Equity Fund. Davis also looks for companies on solid footing, which have plenty of cash and aren't in "financial straits." During the first 11 months of year, Davis says, the S&P's dividend-paying stocks fell by roughly 36 percent; meanwhile, nondividend payers were down about 45 percent. You'll find those dividend payers in more developed industries such as consumer staples, utilities, and healthcare. Examples include Philip Morris, Coca-Cola, General Mills, Bristol-Myers Squibb, and Pfizer.
Consider "alternatives": This asset class, which is used most often by pensions and other institutional investors, runs the spectrum from commodities and annuities to real estate. But individual investors can also use them to dramatically reduce volatility in their portfolios, says Gary Hager, founder and chief executive of Integrated Wealth Management in Edison, N.J. He likes real estate investment trusts, or REITs, which have historically provided a smooth ride for investors. A sample portfolio from 1978 through 2007 shows that putting 10 percent of equity holdings in U.S. REITs improved returns by 0.3 percent and cut volatility by 0.9 percent, compared with investing in stocks alone, according to The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly. Other alternative investments to consider include commodities and inflation-protected securities, both of which are offered in ETF form.



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New car tax break still available

The "cash for clunkers" program ended abruptly on
Monday, August 24. The program, which provided up to
$4,500 to those who traded in their old cars for more
energy-efficient new ones, was so successful that the
$3 billion in government funding was depleted long
before the original November 1 deadline.

If you're in the market for a new car, the IRS wants
you to know there is still a tax break that may get you
motivated to make your purchase this year.

Recent legislation provides an above-the-line tax
deduction for the state and local sales and excise
taxes paid on up to $49,500 of the purchase price of a
qualified new car, light truck, motorcycle, or motor
home. The IRS issued a clarification stating that other
fees or taxes based on the vehicle's sales price may be
deductible in states that have no sales tax.

To qualify for the deduction on your 2009 tax return,
the vehicle must have been purchased after February 16,
2009, and before January 1, 2010. The deduction is
phased out for taxpayers whose adjusted gross income
falls between $125,000 and $135,000 (single) or
$250,000 and $260,000 (joint).

Use tax breaks to offset college expenses

The IRS has published facts about the tax deduction for
tuition and fees that is available to help parents and
students pay for post-secondary education. If you're
facing college expenses this fall, here's what the IRS
wants you to know.

* The deduction is up to $4,000 for single filers with
adjusted gross income (AGI) of $65,000 or less and
joint filers with an AGI of $130,000 or less. If
income exceeds these amounts, the deduction drops to
a maximum of $2,000 for an AGI up to $80,000 for
single filers and $160,000 for joint filers. No
deduction is allowed over these income thresholds.

* The deduction is "above the line," so you don't have
to itemize to benefit.

* You can't take the deduction if your filing status is
married filing separately.