Making Money Work After You Retire

You may have saved diligently for retirement. But if you hope to live in comfort, your portfolio may have to keep working after you stop. The human life span keeps extending. At the same time, the days are numbered for corporate pension plans that pay retirees the same amount month after month no matter what economic and market conditions are like. And with state retirement systems finding it tougher to make ends meet, it means that individuals' financial well-being later in life will depend increasingly -- and for longer, with luck -- on achieving strong investment returns. "The time horizon when you retire is long," said Chris Cordaro, a partner at RegentAtlantic, a New Jersey financial planning firm, reciting the actuarial facts of life. "If you retire at 65 and you're a couple, there's a good shot that one of you will make it to 90."

If you were counting on blowing out the candles on your 65th birthday cake, then selling all your stocks and buying bonds for the income, you might want to come up with a Plan B. The first step in the plan, said Harold Evensky, a financial planner at the Coral Gables, Fla., firm Evensky & Katz, is for imminent retirees to understand what they are up against. "We advise them to get in touch with reality," he said. "It's not just that their life expectancy is longer; they're living much healthier. People are continuing to spend money enjoying their lives. Enjoying life costs money."

That further increases the burden to generate strong investment gains, and a reality check is also in order on that score. "Get realistic on the returns you're going to get on your money," Evensky said. Investors with high expectations -- hoping for returns greater than those available for most assets -- must either lower them or take greater risks to stand a chance of meeting them. George Lynne, director of new business at Psigma Investment Management, a London firm catering to wealthy private clients, is another who urges investors to face facts. His advice is to be neither too aggressive nor too passive. "You've got to go for real assets and real expectations," he said. By the same token, "you mustn't run for cover," he added. "You can't just throw in the towel. You've got to be creative and make your capital work without being greedy."

Nice work if you can get it, but what steps should retirees take to help them achieve the results they need? Lynne would first set a reasonable goal, like a return two to three percentage points per year above the rate of inflation. These days, with inflation in the developed world running at two percent to four percent and stock markets sporting double-digit gains, the objective is easily attained. It may not be so easy this year or next, so he suggests two tactics for smoothing returns: Separate assets into long- and short-term portfolios, and make a fairly large commitment to alternative asset classes that have a history of providing safe returns in most economic climates. Lynne encourages 65-year-olds to place 37 percent of their assets in a "protection fund," as he calls his repository for short-term money. The fund would hold 22 percent of the retiree's total wealth in conventional government bonds, 5 percent in bonds whose interest rates are adjusted for inflation, and 10 percent in cash. His "growth fund," holding the remaining 63 percent, would be invested 25 percent in a mix of foreign and domestic equities, including high-dividend payers; 5 percent in commercial property, 10 percent in foreign bonds, and 23 percent in hedge funds. Having the protection portion of the portfolio to rely on gives the other segment time to recover from bad markets or bad decisions so that the investor will not be strapped for cash. "You're not worried about making a mistake if there's a bear market," Lynne said. By building a portfolio this way, a retiree "is giving a little bit away in potential reward in return for consistently better results," he said. "You're managing risks rather than managing the money."

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