What Should You Do With Your Retirement Savings?


The stock market can be a dicey place for your retirement money, and where to put those precious savings now depends on where you are in life.

"If you are just five years from retirement, you have no business in being in anything remotely risky right now," said Erica Sandberg, a personal finance expert.

In light of a double-dip recession possibly looming and the recent debt downgrade of the U.S. government, that's a smart mentality to have.

"We are literally in the middle of a storm. It's so hard to give direction in the middle of a storm when you don't know which way the winds are blowing," she said.

You're not going to lose sleep -- or money -- if your cash is in FDIC-insured certificates of deposit or a money market deposit account, which earn little interest (around 1%) but can function as emergency fund savings accounts for unexpected expenses.

"If you want to play it safe, that's the way to go," said Sandberg.

Playing it safe typically isn't the advice an investment advisor would give, however. That's because buying and investing during periods of market weakness can pay off in the long run, depending on your risk tolerance and objectives. Contributing toward your 401(k) or other retirement accounts now means you can buy more fund shares, providing you with additional gains when the market goes back up. Risk is directly proportionate to age; the older you are, the less risk you should take.

Setting up a strategy
For pre-retirement folks, invest 60% into stocks and reserve 40% for bonds and cash, says Harrine Freeman, CEO of H.E. Freeman Enterprises. If you are just five to 10 years away from calling it quits in the working world, she suggests flipping those percentages. During your golden golf course years, shrink your funds on Wall Street and invest just 20% in stocks and 80% in bonds and cash.

Stick your money into manufacturers like Philip Morris International (NYS: PM) and Procter & Gamble (NYS: PG) , because such companies sell products that are always in demand. P&G's baby products and household goods never go out of style, and with increasing pressure on cigarette sales in the U.S., Philip Morris is cashing in on the world market. The same rules of eternal demand ring true with utility and telecom stocks.

Another trend to consider is the move toward sustainable investing. "Green" investing isn't just about obvious picks like organic-food seller Whole Foods (NAS: WFM) and outdoors retailer Timberland (NYS: TBL) ; it also includes companies like Google (NAS: GOOG) that have made major investments in green technology. Canon's (NYS: CAJ) U.S. subsidiary has an in-house energy efficiency program that saved more than 2.7 million kilowatt-hours of electricity over the past two years. That's real savings that means higher profits for your shares.

For anxious folks, cut down your investments in stocks and bonds, suggests Freeman. But beware: When the market swings back, you will lose money when you plunk your investments back into stocks and bonds because the prices will be higher.

A different approach
For those in their late 50s and early 60s who are approaching retirement, consider a broadly diversified, global multi-asset class portfolio, suggests Mark Avallone, president of Potomac Wealth Advisors LLC.

"We begin with investment-grade corporate bonds or highly rated municipal bonds as well as dividend-paying large cap stocks," he said.

To broaden diversification, tack on direct investment in real estate, like becoming a limited partner in class A office space to receive income from high-credit-rated tenants.

Investing in properties with high occupancy leased to strong Fortune 500 tenants, for example, can result in high yields between 6% and 7% for the investor. The downside is the lack of liquidity because of the nature of the asset class.

Pharmaceuticals, oil, petroleum, and alternative investments like commodities -- such as corn, coffee products, coal, salt, and sugar -- are also smart places to watch your money grow, but stay from those that are currently overpriced.

Pick the right entry point for diving into select emerging markets. Avallone likes the iShares MSCI Brazil Index ETF (NYS: EWZ) , which has been beaten down as of late. "Brazil's long-term forecast is very strong. We like the opportunity to enter after a period of market weakness. When they go up, they go up very rapidly," he said.

While there's a lot of volatility in emerging markets, including managed futures in the diversification mix can surprisingly reduce portfolio volatility, Avallone said. He calls it a "misunderstood asset class." The trading strategy is not necessarily dependent on economic conditions, which is why when the stocks, bonds, and commodities markets all declined in 2008, managed futures had one of its best years on record.

Avallone also points to variable annuities with living benefit riders or lifetime withdrawal guarantees, which can also transfer risk when a leading insurance company guarantees annual increases in values and/or lifetime income payouts.

"They have provided significant increases to my clients' purchasing power. Even during declines, those companies are on the increase to invest," said Avallone. "The value of the guarantee has been terrific for these investors when diversification is not enough."

Get moving
It's a tough time to manage your retirement savings. But by following sound investment advice, you can get through it with your nest egg intact.

At the time thisarticle was published Fool contributor Tierney Plumb holds no positions in any of the stocks mentioned. The Motley Fool owns shares of Philip Morris International, Whole Foods Market, Timberland, and Google. Motley Fool newsletter services have recommended buying shares of Timberland, Google, Philip Morris International, Procter & Gamble, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published