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  • 23 Oct 2014

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SMART MONEY: Your financial planning may be out of date

Conventional financial planning wisdom has people getting more conservative with their nest egg savings as they near retirement. This formula has two parts — save like hell over your lifetime of work, then put the money in a safe place and live on it the rest of your leisure retired life.

Safe places long touted by money advisers are bonds, bond funds and money market funds. Only a small portion of your money should still be exposed to the vagaries of a stock market mutual fund or investments in individual publicly traded companies. Bank trust managers, financial advisers and others continue to give us this advice even as many experts explain that this strategy is outdated. And the best investment strategy for the next 10 years may be just the opposite of what you’re being told.

by: CONTRIBUTED PHOTO - Julia AndersonThe old thinking has a couple’s nest egg going into tax-free municipal bond funds with an annual withdrawal rate of 4 percent. A $1 million investment would produce about $40,000 a year of retirement income. There are serious problems with such a plan.

According to an in-depth report from the New York Times, our couple has a shocking 72-percent probability of running through their bond portfolio nest egg before they die.

“The probabilities are remarkably grim for retirees who insist on holding only bonds in the belief that they are safe,” said Seth Masters, chief investment office of New York-based Bernstein Global Wealth Management. The fundamental problem as explained in the Times article: With bond funds earning well below 4 percent a year, you can’t withdraw 4 percent a year without depleting that portfolio over time. Add in an average 2 percent-a-year inflation rate and you’re really up against it.

The Federal Reserve’s low-interest rate policy continues to support our weak economy and juice up stock markets. But when interest rates return to normal levels (in the 3 to 4 percent range) bond values will decline. So will your bond portfolio.

Meanwhile, millions of baby boomers are coming to terms with retirement knowing they may live 20 or 30 years longer, many into their 90s.

Reverse the traditional mix

According to the Times report, an 80-20 mix of stocks to bonds with an annual withdrawal rate of 4 percent on a $1 million portfolio will reduce the probability of running out of money to just 14 percent. With a 3 percent withdrawal rate the probability drops to just 4 percent.

Yes, stocks are higher risk but in our new world, so are bonds. For example, a friend of mine saw the value of his newly invested bond fund drop in value by 17 percent in just the past few months as savvy investors already see the wisdom of dropping bonds in favor of stock funds. My friend zigged when he should have zagged on the outdated advice from his wealth management firm.

What else can you do to secure your retirement?

n Work as long as possible. Every year you delay taking Social Security after age 62 means an 8 percent increase in the benefit up to age 70. The maximum payout at age 66 is $31,000, which is the equivalent of taking a 3 percent return on a $1 million portfolio.

n Pay off your mortgage. That way you have less expense and the opportunity, if needed, to tap your home equity.

n Think hard about the pluses and minuses of buying a fixed annuity. They typically won’t do any better than what you can do on your own. If you die, the money is gone rather than being passed on to heirs or to your favorite charitable organization.

n Plan for being on your own. Husbands most often die before their wives. Make sure your long-term plan includes reasonable contingencies for those who will face their later years alone. And finally, hire a wise money adviser who understands that retirement won1t be the same for baby boomers who may want to work part-time or otherwise remain active as they age. Put together a plan that makes sense for your life-plan, your dreams and goals.

Julia Anderson is the founder and ongoing contributor to her Web site sixtyandsingle.com where she writes about women, money, retirement planning and the challenges of life after 60.