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The Cold, Hard Facts Behind Funding Your Retirement

Author: Ethan Smith

Many folks are afraid they simply won't be able to retire – or stay retired – when and how they planned. We can talk about retiring later, taking a part-time job, and cutting back on expenses, but those are only partial solutions. Of the seniors who are still working, very few are earning as much as they did at their peak. Their life savings still needs to make up the difference.

I receive a lot of letters from very concerned baby boomers and retirees who are watching their principal erode every year, but they don't know what to do about it. Unfortunately, some have unrealistic expectations.

I received a note from a woman in her early 70s who had fired her stockbroker (for good reason), and asked if there was a basket of mutual funds she could invest in that would do the trick. I had to tell her that there simply are no "set it and forget it" solutions anymore.

When our parents retired, CDs earned enough interest to keep their portfolios afloat. As long as they had saved diligently for retirement, they could go on trips and maintain the same lifestyle without much worry. Today, even if you have a sizeable nest egg, you still need to actively manage your portfolio. Otherwise, it will slip through your fingers.

If you are as concerned about inflation as I am, precious metals are the best place to start. Historically, they have held their value even as governments and currencies collapsed. No, I do not suggest selling everything and buying gold and silver. There is no one investment that can do everything our portfolios need. However, a moderate, long-term investment in precious metals will help hedge your portfolio against inflation.

What about additional income to help pay the bills? One of the reasons the stock market is doing so well is because retirees are desperate. There is no other place left to earn a decent yield, and so we have to put our money at more risk than we would like. The lessons of 2008 are still in the back of our minds – for good reason. But the Federal Reserve has made it clear that interest rates are going to stay low, so we have to learn to manage the risk to our portfolios as we invest in the market.

In How to Profit from Risk, I recommended allocating a small portion of our portfolio in speculative investments. Retirees have a lot to lose, so high-risk, high-reward investments should represent no more than 10% of our portfolios. And, of course, never invest a penny without thoroughly researching an investment. They won't all be winners, but when one does well, it can take a lot of pressure off the rest of your portfolio.

So, if we own precious metals to hedge against inflation and a small number of speculative stocks to relieve the pressure, what should we do with the rest of our portfolio? Again, there is no one answer. However, every investment in a retiree's portfolio should be weighed against our Five-Point Balancing Test:

  • Is it a solid company or investment vehicle?
  • Does it provide good income?
  • Is there good opportunity for appreciation?
  • Does it protect against inflation?
  • Is it easily reversible?

If our portfolio is going to keep up with inflation and provide income to supplement our Social Security checks, a sizeable portion of it should be in reasonably safe investments that will appreciate and provide dividend yield. Putting no more than 5% of our portfolio into any one investment with a 20% trailing stop will further help limit risk. That way, if the stock tumbles, we can't lose more than 1% of our overall portfolio.

The first cold, hard fact of retirement is that it takes a lot of money. The second is that it takes lots of work. Most of my friends who are doing well in retirement are spending a lot more time looking after their life savings, and a lot less time on the golf course than they originally intended. They are, however, enjoying the peace of mind that comes with knowing they are on top of their finances.

Dividend income is a good way to start funding your retirement portfolio. Speculative stocks are great (and fun if they're giving you good returns and you're using my 20 / 5 rule mentioned above), but the core of your portfolio needs to be stocks you can rely on for stability; and a little extra cash through dividend payments is a bonus. That's why I've put together a new report called Money Every Month outlining exactly how to build a portfolio that pays out each and every month and even tells you which stocks you should consider owning. I've recently released a short presentation showing exactly how it works and how you can start as early as today. Here's the link.

Dennis Miller is the author of Retirement Reboot, a book chronicling his own journey to save his retirement in a low yield, turbulent investing environment and providing readers with actionable ideas for getting their retirement finances back on track. He works with some of the country's top investment managers, authors and analysts to tackle the financial challenges faced by today's retirees. Working with analysts at Casey Research, Dennis created "Miller's Money Forever," a newsletter that provides retirees, and those soon to be retired, with actionable recommendations on how to prepare and maintain a profitable retirement portfolio. Prior to retiring in 2008 Dennis ran a successful consulting business and authored several books on sales management. He was also a regular contributor to the American Management Association and an active international lecturer for 40 years. Find more of Dennis' columns and latest special research reports at millersmoney.com or contact him at [email protected]

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