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Special Report: Strategies for Volatile Market | RETIREES

When the Mix Is the Biggest Challenge


Bruce and Beverly Cosper of Arroyo Grande came late to the stock market. The couple started seriously investing in equities only seven years ago, when Bruce was 68 and Beverly was 60.

The Cospers now have half their nest egg in stocks, the other half in bonds. Yet despite double-digit losses on some of their stock funds this year--and increasing talk that the nearly 8-year-old bull market may have ended--the couple have no plans to change their portfolio mix.

In fact, they plan to rebalance their portfolio later this year with the help of their financial planner and will buy more stocks if necessary to keep their 50-50 mix.

"People are panicking over this," scoffs Beverly, 67. "We have some faith in the American system. We're going to continue on with our investing."

By contrast, Phil and Blanca Ross of Fullerton trimmed their stocks from 75% of their portfolio to less than 33% in recent weeks, and Phil, 68, wishes they had bailed out sooner.

"I'm erring on the side of caution, since I'm retired," he says.

Although the stock market's gyrations have rattled many individual investors--most of whom have never experienced a true bear market--retirement-age investors face a unique set of needs and challenges in coping with the turmoil.

In fact, the decisions these older investors make now could determine whether their last years are comfortable or comfortless, financial advisors say.

The good news is that today's retirees have significant buffers against stock market swoons. Most have Social Security to fall back on, and many have pensions and significant home equity as well.

Still, financial missteps by retirees--including losing a significant sum in the stock market--can have serious consequences. Whereas working people can save more, put off retirement or pick up a second job if their investment plans falter, options are often more limited for retirees.

"When you're younger, you can take bigger risks, because if you do lose, you can make it up with your income," said Earl Gross, a retired insurance broker from West Hollywood. "But I'll be 74 this month, and I don't want to go back to work."

Memories of '29 Crash

Current retirees and older investors also know just how far stocks can fall. Many remember the Depression-era bear market that slashed the value of the Dow Jones industrial average by nearly 90%; the Dow took 25 years to recover its former high.

While subsequent bear markets have been shorter and recoveries quicker, the damage the 1929 crash inflicted is never far from many retirees' minds.

"I remember what it was like even though I was small," said Lonell Spencer, 69, a retired machinist who keeps the bulk of his retirement funds in bank certificates of deposit. "You don't ever forget what people went through."

Some simple math speaks volumes about stock market risk: An investment that falls 50% in value must then rise 100% just to get back to even.

Even so, most financial planners argue that retirees need to keep at least part of their nest egg in stocks at all times, because historically stocks' returns have outpaced the inflation and tax bites that steadily erode retirees' buying power.

"There's nothing magical about turning 65 except that you're one day older," said Joel Framson, a financial planner where and past president of the California Society of Certified Public Accountants. "You still need growth. You have 20 or 30 years of retirement to get through."

Although inflation has been in the 2% range in recent years, there's no guarantee it will stay there. An annual inflation rate of just 3% would cut the buying power of today's dollar to 50 cents in about 23 years. At 5% inflation, prices would double in 13 years.

Stocks, meanwhile, have historically returned about 11% annually on average, despite regular bear markets. That is well above the historical returns on long-term government bonds (5.2%) and short-term money market securities (3.8%).

What's more, because long-term capital gains are taxed at a maximum of 20%, whereas interest income is fully taxable as income, stocks' long-term returns are more substantial on an after-tax basis.

Nevertheless, lower-returning bonds, money market investments and bank CDs offer retirees something that stocks can't guarantee in the short term: capital preservation.

What Dictates the Mix

The challenge for retirees, perhaps much more so than for younger investors, is coming up with the proper mix of stocks, bonds and "cash" accounts.

For some, the mix is dictated by the amount of money they feel they'll need in order to live comfortably in later years.

Jerry Olsen of Irvine feels he has little choice but to stay heavily invested in stocks. The 70-year-old engineer started saving for retirement just 10 years ago, and by his calculations he needs a 10% annual return to retire in five years.

So Olsen expects to keep about 90% of his 401(k) plan in equities; his investments will eventually supplement his company pension and the Social Security checks he already receives.

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