New Rules of Retirement

The New Rules of Retirement
Losses Prompt Revised Thinking on How to Invest And When to Retire; Rebuilding Your Nest Egg

If you are saving for retirement, the stock market's plunge has been painful. If you are already retired or nearing that point, it has likely been a disaster.

The bear market of the past 2½ years has wiped away more than $678 billion of retiree wealth, according to an estimate based on the University of Michigan's Health and Retirement Study. The continuing study, which began in 1992, tracks 20,000 people from age 50 until they die. The Michigan researchers estimate that there has been a 10% decline in the portfolio of the typical retiree who holds stocks directly or through an IRA.

In response, many retirees are seeking out help rebuilding their nest egg. In the first six months of 2002, T. Rowe Price handled 40% more calls to its advisory group, which provides help with retirement planning. The AARP says calls and letters from worried retirees and preretirees have more than tripled in the past year.

The losses have prompted some changes in thinking about how to invest and when to retire. Many advisers are recommending that older people dramatically restructure their portfolios, dumping their weakest holdings even if it means missing out eventual gains down the road. Certain annuities are seeing renewed interest because they can offer returns higher than those on bonds. Some planners are also downgrading expectations for what people should earn in retirement.

Portfolio Repair
Here is the new thinking on getting the most from your assets in the current market.
Sell your losers, but don't give up on stocks
Buy bonds and certificates of deposit for cash needs
Consider adding fixed annuities to your portfolio
Trim the annual withdrawals from your retirement funds
Lower portfolio growth projections to 7% or 8%
Reassess your tolerance for stock-market risk

Buy Annuities: Some planners are once again recommending fixed annuities, sales of which hit a record $22.1 billion in the first quarter. "I hadn't looked at them in 10 years, and now I am because they have higher returns that anywhere else in the fixed-income world," says Deborah Voso, a fee-only financial planner in Frederick, MD., who notes that yields in the 5.25% range are common with these investments.

Retirees should generally avoid variable annuities, which often carry high fees and other unattractive features. Instead, look for fixed annuities in which there is a guaranteed rate of return for a period of years - and no charge for cashing out at the end of that period. That way, investors won't be hit with big surrender charges for getting out when the guaranteed rate drops.

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**The above excerpts are from the complete article which appeared in The Wall Street Journal, Tuesday, July 9, 2002.

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