Those who are retired face the problem of making things work in an entirely different personal environment from the one they were accustomed to during their working years.
And the problem is complicated by major uncertainties about inflation, interest rates, business failures and the whole gamut of other factors that make up our national economic picture.
Retirees have their own set of worries, only some of which are similar to the kinds of things bothering those still working.
For example, there is continuing anxiety about the solvency of the Social Security system. But it is extremely unlikely that the Social Security system will be permitted to go into default. On the other hand, it is highly probable that changes will be made, perhaps in areas such as retirement eligibility age, computation of benefits, and the tax burden on current workers.
Perhaps the greatest amount of uncertainty faces those who have accumulated some savings during their working years to supplement Social Security benefits and public or private employer pensions.
The number and variety of opinions on the future course of the economy, the markets, inflation and interest rates is perhaps exceeded only by the number and variety of financial vehicles stridently competing for your investment funds.
As those of you who are already retired try to make some sense out of this macrocosm, there are some constants about your status to keep in mind that are not affected by most external conditions. Although individual circumstances vary, these guidelines apply in most cases.
Your investments are now expected to provide a much larger part of your total income than when you were working. During the working years your salary was the major contributor to your income and investments were only incidental. Although this situation may not be totally reversed, the ratio between job-related income and investment income has changed.
Your financial goal is income-oriented rather than growth-oriented. Having reached retirement, you should now be concerned primarily with the production of current income rather than further growth of your capital base.
Your threshold for risk tolerance should be lower. You no longer have the luxury of years ahead when you don't require an investment income to recoup any losses suffered in speculative investments. And because you don't have a salary or wages to provide the bulk of your support, you can't afford the risk of even temporary interruption of the steady stream of investment income.
It's likely that you dropped into a lower federal income tax bracket at retirement. That probability, coupled with the three-year overall reduction in tax rates, means less need for emphasis on tax shelters.
It isn't possible to pick a single benchmark as the "best" time to switch investments from growth to income, from speculative to conservative and from tax-sheltered to taxable. But certainly when preparing for retirement or immediately after retiring, all your investments should be reviewed for their suitablility in your changing financial situation.
Because it may be the easiest to define, let's start with the question of "income" versus "growth." Instead of a potential for later gain, what you want is an investment that generates income that is predictable both in amount and frequency.
Treasury securities, passbook accounts and certificates of deposit at savings institutions, preferred stocks, bonds (corporate or municipal, depending on your tax situation), unit trusts, insurance annuities and GNMA (Government National Mortgage Association) pass-through certificates all meet this criterion.
Mutual funds -- including money market funds -- may provide income at regular intervals, but the amount of that income is likely to vary from payment to payment. The size and direction of variation will depend on changes in the economy and on the skill of the fund managers.
Conservative real estate investment trusts -- those that hold a portfolio of developed rental properties -- may squeeze into this category. And you might even make a case for oil and gas drilling partnerships invested only in developed and producing wells.
The field of common stocks covers a wide range of income possibilities. The dollar amount of dividends has remained consistent for a large number of well-managed companies.
Now, how about risk? Well, as it turns out, the scale from low risk to high risk closely resembles the income pattern we have just looked at -- if you subscribe to the traditional definition of risk as referring to the probability of timely payment of income and principal.
Treasury securities and some agency obligations, such as GNMA mortgage certificates, are backed by the full faith and credit of the United States. Other government agency securities don't have this absolute backing, but are generally considered very low risk anyway.
Passbook accounts and certificates of deposit at federally chartered savings institutions are insured up to $100,000 by an agency of the federal government. State-chartered institutions may have comparable insurance coverage from a state agency.
But "repos" -- repurchase agreements -- are not so insured; they may or may not be specifically backed by government agency securities, but the financial stability of the savings institution must be considered when evaluating the risk involved.
The amount of risk associated with a preferred or common stock or a bond is directly related to the financial condition of the issuer. Independent rating services (Standard & Poor's, Moody's) estimate the quality of most publicly held corporations and some municipalities. Their rating guides are available at many libraries.
There is a second kind of risk. If you put $10,000 into a 30-month certificate of deposit at a bank, S&L or credit union, you can feel pretty confident that 30 months from now you will get your $10,000 back, along with whatever interest was not paid to you during the term of the CD.
But dollar bills have no intrinsic value. Their only worth is in the goods and services for which they may be exchanged. In an inflation-plagued economy, that same $10,000 buys a lot less when you get it back than when you put it in.
Fortunately, inflation has moderated substantially in recent months. But if you get a 10 percent return during a year in which in inflation hits 14 percent, the combined purchasing power of principal and interest is less at the end of the year than the principal alone at the beginning -- so you have lost ground.
The same interest rate of 10 percent in a year of 6 percent inflation gives you real income of 4 percent, and some hope of coping.
During the years that inflation was running in double digits, many retired people felt compelled to accept greater risks than they would have liked, to keep from being squeezed between the rock of fixed yields and the hard place of inflation higher than their rate of return.
If inflation can be kept under control and this year's trend continues, you can return to a more normal investment strategy. But the painful lessons of the past few years should not be forgotten. This is no time for complacency or for an assumption that the immediate past won't be repeated.
What's the answer? Well, there's a name for the strategy to adopt in a time of major uncertainty when you have no idea of the future course of the economy in general and of inflation, interest rates and business profits in particular.
It's called "diversification" (or "hedging" if you prefer the gambler's term). And all it means is that you spread your funds around among a variety of investments to cover a range of possibilities.
You put some of your money into fixed-return investments to assure a minimum income and to protect your principal if inflation gets near zero or we drop into a period of disinflation (or deflation).
And you divide the fixed-return money into long-term and short-term. The former, including bonds and unit trusts, protect a high yield in case interest rates fall, while the latter -- bank CDs, Treasury bills or a money market fund -- give you an early rollover if rates go up.
Then you put some money into equities to help protect against the possible recurrence of high inflation rates. A large part should probably go into the common stocks of high-quality companies with a good record of regular increases in the dividend rate. Some of your money could go into an income-oriented limited partnership in real estate or oil and gas.
Depending on your personal investment philosophy, tolerance for risk and general financial situation, you may risk a small part of your resources in emerging growth companies on the chance that you might pick the next Xerox or Polaroid.
If you prefer the professional management and portfolio diversification of mutual funds, you can find one or more to fit each facet of your investment plan. And your tax bracket will determine whether to pick, say, corporate bonds or municipals (tax-free).
The best place for your emergency cash fund is likely to continue to be a money market fund or one of the high-interest ready-access funds developed in recent months by various savings institutions. Look for more of these to show up as federal controls on interest rates are lifted.
You may want to keep part of your investment funds there, too. Everyone hates to feel that they missed the boat on some fantastic investment opportunity, so you may want to hang on to some cash to take advantage of those that open up down the line.
There are peripheral circumstances that affect your investment strategy. For example, if you receive substantial government retirement pay that is at least partly protected against inflation, you may want to put a larger part of your money into fixed-return investments.
Do you have heirs to whom you want to leave an estate, or are you interested in spending your last dollar on the day you die? If the latter, you may find that an insurance annuity, which provides a continuing income you can't outlive, suits your needs.
There is one piece of advice that applies to everyone, regardless of personal circumstances -- assuming that you do have funds to invest. It is a mistake to keep all your funds in a passbook account at a savings institution because you think it's the only safe way to go.
Of course, it is the simplest way to go. To do anything else, you will have to do a little reading and a little thinking, and then you will have to make choices.
But if you were smart enough to accumulate some savings in the first place, then surely you're smart enough to figure out where to put it to provide you with the best retirement years possible from a financial point of view.