Adjusting Your Investment Mix Near Retirement Makes Sense -- If You Don't Overreact

For Nalin Parikh, retirement seems so close, yet so far away.

At 64, he was ready to retire from his job as a physics professor at the University of North Carolina at Chapel Hill by next August. The plan was to settle into a quiet life with his wife in their townhouse in North Carolina, occasionally traveling to his homeland of India or visiting his children in Arizona and Maryland.

That was before the stock market started to seesaw, before he lost more than $5,000 in his 403(b) plan, which is essentially a 401(k) for university, civil government and nonprofit employees. Now he is wondering what he should do to ensure that he can retire next year, or the year after, or even the year after that. "How long do I need to work?" he asked when I talked to him by phone at his son's home in Takoma Park, where he was staying last week.

Parikh submitted his question after studying his 403(b) portfolio. He wanted to know whether he should rebalance it so it would have less exposure to stocks. "I've never been great with my money," he acknowledged in his e-mail.

Many of us are probably feeling that way right now. And I'm sure many of you soon-to-be retirees are having doubts about the investment decisions you've made. You're all getting your 401(k) or 403(b) statements around now and wondering: Should I get out of stocks? Should I get into more bonds? Money markets? Treasury bills?

Parikh's portfolio looks like this: 25 percent in socially conscious equities, 25 percent in international stocks, 25 percent in a money market, and 25 percent in inflation-linked bonds.

Parikh asked whether he should transfer 25 percent from the socially conscious stocks to one of these four options: a money market, a traditional annuity, an inflation-linked bond or a "life-cycle" retirement fund.

Dan Keady, director of financial planning for TIAA-CREF in Baltimore, said that before making any decisions, Parikh and others have to consider a few things. What will your income needs be at retirement? What will your expenses be, especially for health care? Will you have other sources of income besides your defined contribution accounts, which is what 401(k)s and 403(b)s fall under?

Parikh said his monthly mortgage is about $1,400. He also expects to pay $700 monthly for long-term care insurance for him and his wife, who does not work. Add to that $200 or $300 for Medicare and supplemental health insurance. Then there is food, utilities, clothing and other day-to-day living expenses.

Retirement is obviously not cheap. But Parikh has the benefit of Social Security and a pension, which will give him about $5,500 a month before taxes. Still, that's less than what he's earning now, so he was hoping the 403(b) money would go a long way. As of Sept. 30, he had about $59,000 in that account.

Given that he is so close to retirement, Susan Hamilton, a senior financial planner at West Financial Services in McLean, recommended a conservative asset allocation. Right now, she noted, he has 50 percent in equities and 50 percent in fixed income and cash. She said he should have 40 percent in equities and 60 percent in fixed income and cash. For his stocks, she recommended putting 32 percent in socially conscious and 8 percent in international. "You still need some equity exposure in the portfolio for long-term growth to outpace inflation," she said.

Which is why moving 25 percent out of socially conscious stocks to fixed income would be unwise, she said. That would mean he would have just 25 percent in equities, all in international, which would be risky.