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Well Into Retirement and Caught Short on Income

By Nancy Trejos
Sunday, November 2, 2008

Elizabeth Small was lucky enough to retire in her early 50s after she inherited some money.

With her inheritance tucked away in a number of stocks and mutual funds, the former secretary settled into what she thought would be a comfortable life in Charlottesville.

But life is no longer comfortable. Since April, the global financial crisis has chipped away at $200,000 worth of her investments. Her small Social Security check -- about $400 a month -- is not enough to cover her mortgage and living expenses. "I'm totally dependent on my investments for my income," she said.

She's weathered market declines before. In 2000, she lost $800,000 and has yet to recover it all. The recent drop in her portfolio, she said, "happened so quickly," and has been so frightening that she sent us a passionate plea for help, one that many other retirees might be making to their financial advisers or relatives. "I think at my age, I have no more buffers and cannot afford another major loss," she wrote. "The next time, I may lose it all. I don't want to spend the rest of whatever life I may have left being at the mercy of Wall Street."

She is 64 now and more than a decade into retirement. But she is now thinking of getting a part-time job. At the very least, she thinks she should take money out of stocks and put it in a certificate of deposit. Or take money out of stocks and move into bonds.

"Everyone says ride it out," she said. "There's not much riding I can do."

Planning for retirement is tricky because of "longevity risk," said Dean Catino, managing director of Monument Wealth Management in Alexandria. "People are living 30-plus years in retirement, and sourcing a secure income flow that can increase with inflation is paramount to a successful retirement," Catino said.

Even though she's already in retirement, Catino said Small should take another look at her needs as well as her lifestyle and aspirational goals. That is, what are her expenses? Does she want to travel, go to plays or buy a car? Does she want to buy a second home or contribute to charities?

Then she has to look at her portfolio and see whether it supports those needs or goals.

Small said she has 77.6 percent in mutual funds, 12.7 percent in preferred stocks, 4.7 percent in corporate bonds, and 5 percent in cash and its equivalent.

Of her nine mutual funds, three concentrate on global investments. That's not a good thing, Catino said.

"That's like coaching a baseball team and having three people playing first base," he said. "We need only one good player for that position."

Kim Cox, a certified financial planner at West Financial Services in McLean, also had concerns with Small's asset allocation. Small should have at least half in equities and half in fixed income, she said. "A portfolio that is providing retirement income should almost always have a fixed-income component where the bonds generate income and can also be used for cash flow when equity markets are down," she said.

With losses in equity markets reaching 30 to 40 percent, now is not the time to sell and move to CDs, she said. "CDs will probably not provide adequate income going forward as Ms. Small needs to be concerned about inflation over her life expectancy, as well as current income needs," Cox said.

Cox recommended that Small sell her international mutual funds because they will probably recover later than domestic markets, then use the proceeds to buy high-quality bonds that have been yielding more than 5 percent recently. "Over time, on market rebounds, she should bring her equity allocation down to no more than 50 percent with the remainder in high-quality individual bonds," she said.

Small's preferred stocks should be fine and continue to provide dividend income, said James S. Ibach, a certified financial planner at Falls Church-based Globus Agency, an office of MetLife.

Ibach also said she should consider using some of the money from the sale of some of her investments to buy a fixed immediate annuity, which would cover her monthly expenses. It works like this: You buy it with a lump sum, and then you begin receiving guaranteed income soon after. But anyone thinking of that option should consult with a professional to fully understand how it works.

There is more Small could do than rebalance her portfolio, the advisers said. She could cut down on expenses -- and yes, consider a part-time job. The benefit of the part-time job is not only the immediate income, but also the added Social Security benefits, Ibach said.

Finally, Ibach said, maybe Small should be more creative in finding new sources of income. Since she lives in a college town, why not think about renting a room to an undergraduate or graduate student?

"I believe with some help, solid professional advice and planning," Ibach said, "Ms. Small will be able to weather this crisis and secure her financial future."

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