Spring 2009

Recovery for Your Retirement

By Anita Slomski

Amid last year's tsunami of negative financial news, even the most seasoned investors struggled to escape a bear market broadside to their retirement savings. Like natural disasters and unforeseen life events, investment setbacks can be unpredictable and challenging, but it's vital to get back on track quickly with a realistic investment plan.

Those who don't intend to tap retirement accounts for at least five years may be able to stop panicking. You have time to try to recoup losses as the market recovers provided you stay properly invested. "After the 15 bear markets we've had since 1932, Standard & Poor's 500 stock index gained an average of 46% in price during the first year of a new bull market and recovered 82% of the prior bear market's losses during that year," says Sam Stovall, Chief Investment Strategist for Standard & Poor's Equity Research and author of The Seven Rules of Wall Street. "And in the first 40 days of a new bull market, on average you could gain back one-third of what you lost in the prior bear market."

Keeping in mind that past performance does not guarantee the future, that historical trend may be of some comfort to those on the verge of leaving the workforce or already in retirement. Buying stocks now may help restore growth potential to portfolios that may have to fund 30-year retirements. "We think the market is undervalued by more than 30%, so in a few years the returns from these depressed stocks could look very good," adds Marc Schindler, CFP and partner of Pivot Point Advisors in Bellaire, Texas.

But simply waiting passively for the markets to recover won't rebuild your retirement savings. For some investors, the best strategy will be to restore the asset allocation they had before the bear market swept in. Because bonds vastly outperformed stocks last year, many portfolios might be skewed more toward fixed-income securities than intended. Rebalancing could mean selling bonds and buying stocks at a time when those moves could provide substantial potential benefits. "Rebalancing is a forced way of buying low and selling high," says Schindler.

Other investors may decide that their asset mix itself needs an adjustment - often to create a portfolio that might provide a smoother ride through turbulent markets. "Many investors are more comfortable taking risks during a bull market, when investments keep going up," says Brian Pon, a financial planner with Financial Connections Group in Corte Madera, Calif. But if last year's volatility was too much for you, a more conservative asset mix could be a better choice, helping you resist cashing out your investments when markets plunge.

"The old rule of thumb that your bond allocation should equal your age may be worth a second look," says Stovall. Of course, reducing the risk in a portfolio could also limit its potential return, and that could mean saving more to make up the difference.

Meanwhile, other investors, seeing ample buying opportunities, have ratcheted up the aggressiveness of their portfolios, hoping to achieve outsize returns. "Many stocks are very cheap right now, so it may make sense to increase your equity positions, especially for younger investors," says Keith Garcia, Senior Product Manager for Retirement and Goal Planning for TD AMERITRADE. The best course may have much to do with where you are in your investing life.

Years to Go Before You Quit Working

The most important thing for people in their thirties and forties to do may be to continue saving. Pon says many investors, stung by losses in their 401 (k)s and other retirement accounts, have considered suspending contributions to their retirement plans. But that's counterproductive, he says, particularly because it means missing out on tax savings and possible company matching contributions. Pon in fact suggests accelerating retirement saving before the market recovers.

"Instead of investing in your 401 (k) over 12 months, consider trying to cram in all your contributions during the first part of the year, if your employer allows it," says Pon. If you meet the income requirement - an adjusted gross income of less than $100,000 whether single or filing jointly - you might also consider converting a traditional IRA to a Roth IRA. (In 2010 the income ceiling for Roth conversions disappears.) Although you'll pay taxes on the amount you convert, the beaten-down balances of most IRAs could mean a much smaller tax bill than you'd have seen a year ago. A market recovery after the conversion could boost the account's value, from which you'll be able to make tax-free withdrawals during retirement.

What's typically not a good idea is borrowing from retirement accounts. "Keep your retirement assets fully invested to help you receive the maximum benefit from future rallies," Garcia says.

On the Verge of Retiring

If your nest egg has suffered badly; it could make sense to postpone retirement by at least a year or two. Each year you delay drawing upon your savings could result in a substantially larger account balance - and reduces the number of years you'll be depending on that money. According to the Center for Retirement Research at Boston College, people who worked full-time until at least age 66 had retirement incomes one-third higher than if they had quit work at 62. And working longer currently means a higher payout from Social Security: Each year from age 62 through 70 that you put off receiving benefits increases the value of your monthly check by 8%. "That's a good return on your money," says Pon, provided you're in good health and expect to enjoy a long retirement.

Staying on the payroll longer could also help you build up a cushion of cash and fixed-income investments. Pon suggests creating a revolving five-year bond ladder to fund monthly expenses. Also consider putting cash for the first three months of retirement in a Federal Deposit Insurance Corporation-insured money-market deposit account (not to be confused with a money-market mutual fund, which is a security that can lose value), and invest funds for the next six to nine months in Certificates of Deposit (CDs) . High quality short- and intermediate-term bonds could help cover expenses for the following four years. With that money set aside, you can put your remaining assets into stocks and balanced funds likely to outpace inflation and provide needed growth. "If you know you aren't going to need that money until 20 14 or so, you can buy stocks with increased confidence that you can weather a down market," says Pon

Already Retired

If you've retired but haven't built a safety net to cover at least two years of expenses, that should be a priority. It's also important to minimize withdrawals from retirement accounts. "For every dollar you withdraw, you lose the opportunity for that money to bounce back when the economy recovers," says financial planner Tom Orecchio of Old Tappan, N.].

For stable income during retirement, choose dividend- paying stocks for your equity portfolio, advises Stovall. "During the past 70 years, about 40% of the total return on the S&P 500 has come from reinvested dividends," he says. "The S&P on a price-only basis fell 23% during the past 10 years. But if you owned the S&P Dividend Aristocrats - about 60 companies that have consistently increased their cash payouts to shareholders - you would be up 44% ." Stovall suggests looking for companies that are highly ranked by analysts and that have dividends representing no more than 600/0 of earnings or cash flow. That should help the company avoid cutting payments to shareholders.

CDs can help provide a steady stream of income during retirement, and TD AMERITRADE's one- to five-year CD ladder may help insulate retired investors from market volatility. Unlike a bond mutual fund, the value of which may rise and fall as interest rates change, the CD ladder offers predictability and stability. The ladder consists of FDIC-insured CDs with a range of maturity dates so that one matures each year. As the CDs mature, the investor can use the proceeds or reinvest them in a longer-term CD if they are looking to keep the ladder intact. "CD ladders are designed to provide the same income every year, and you know exactly when you are scheduled to get your principal back," says Perry Guarracino, Director of Fixed Income Product Management for TD AMERITRADE.

If you are looking for monthly retirement income, you might consider TD AMERITRADE's Five-Year Monthly Pay Portfolio, composed of lower-risk securities such as CDs and Treasuries. Or you could use the Bond Wizard tool to build your own bond ladder.

Whether your retirement is decades away or started years ago, repairing market damage to your portfolio is bound to be a priority. Assessing your situation, making a plan that factors in new market realities and then implementing it with a broad mix of assets can help you once again invest confidently in your financial future.

TD AMERITRADE is not responsible for information, opinion or services provided by third parties. Past performance is no guarantee of future results. TD AMERITRADE does not provide tax advice. "We suggest you consult with a tax-planning professional with regard to your personal circumstances. Investments in fixed income products are subject to liquidity (or market) risk interest rate risk (bonds ordinarily decline in price when interest rates rise, and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Availability of products and services may vary by jurisdiction. Steady income is subject to the credit risk of the issuer of the bond or CD. If an issuer defaults, no future income payments will be made. TD AMERITRADE is not responsible for ensuring that your use of the Bond Wizard tool is suitable for your specific financial situation. You must perform your own evaluation of whether the securities held in your portfolio are consistent with your investment objectives, risk tolerance and financial situation. The types of CDs available through TD AMERITRADE are called Brokered CDs. They are similar to CDs purchased directly from a bank, except they can be traded on the open market. This means you can sell a Brokered CD before its maturity date. Should you choose to sell your CD prior to maturity, you should know that Brokered CDs sold prior to maturity may result in loss of principal due to fluctuation of interest rates, lack of liquidity or transaction costs. Brokered CDs available through TD AMERITRADE are deposit obligation of the issuing bank. As a bank obligation, the CDs, along with other deposits you may hold at the issuing bank, will be eligible for insurance by the FDIC of up to $250,000 (under new legislation, effective through December 31, 2009). You are responsible for monitoring the total amount of deposits, including CDs, that you maintain at the issuing bank in order to determine the extent office coverage available to you. TD AMERITRADE will not be responsible for any insured or uninsured portion of the CD