While most investments involve risk, investment professionals say retirees and those nearing retirement can avoid some land mines by following simple advice.
Individuals within a few years of retirement or already retired should keep enough money in safe, liquid assets to cover living expenses for five years, said Jag Mehta, adjunct finance professor at the University of Nevada, Las Vegas and a chartered financial analyst.
Need $50,000 a year for expenses in addition to Social Security and pension income?
Mehta says to keep $250,000 in bank accounts, bank certificates of deposit and short-term bond funds that hold Treasury securities and other high-quality bonds.
Mehta warns investors not to hold most of their assets in stocks, commodities, futures contracts, real estate and collectibles. “All these are illiquid assets. You don’t want to sell your risky assets at the wrong time.”
Instead, he said to rely on liquid, low-risk assets for short-term cash needs so it isn’t necessary to sell risky assets when market prices of illiquid investments are depressed.
Retirees should be ready to wait five years before selling stocks, real estate or other illiquid assets that have temporarily declined in value, Mehta said.
Investors who start young can follow another rule, which calls for subtracting their age from 110 to determine the percentage of investments they hold in stocks, he said.
By age 60, they would have 50 percent of their holdings in stocks and another 50 percent in low-risk assets, he said.
David Ehlers, chairman of Las Vegas Investment Advisors, recommends that retirees stick with bank certificates of deposit.
CDs “are a very safe investment,” said Leonard “Pat” Goodall, professor emeritus of public administration at UNLV and former president of the university. “They are not going to make much money.”
Ehlers favors CDs for up to a year, but he has stayed away from longer maturities, because he expects inflation to pick up and drive interest rates higher.
The holder of a CD can be assured of getting his money back, assuming he doesn’t hold more than the typical $250,000 maximum protected by the Federal Deposit Insurance Corp.
Some credit unions in Nevada have federal deposit insurance through a separate agency, the National Federal Credit Union Administration. Several Nevada credit unions have deposits insured by American Share Insurance, a private company.
Most analysts say no entity can match the guarantee of the federal government, which can print money if it runs short.
Ehlers recommends that savers put their money in some of the shakiest banks insured by the FDIC, because problem banks typically pay high rates and the government, rather than the depositors, takes the risk.
“The banks that pay the highest rates are the banks in trouble, but they are still government insured,” Ehlers said. “It pays to shop.”
Bankrate.com lists banks with high-yielding certificates of deposit. To get the highest rate, a saver often must choose an out-of-town bank.
Russell Price, director of private banking at Nevada State Bank, favors high quality, short-term municipal bonds that yield more than Treasury securities of the same maturity.
Goodall, co-editor with Corney of the No-Loads Portfolios newsletter, recommends that investors divide assets among cash, stocks and bonds.
“Many people will want to add real estate as a fourth category,” Goodall said.
He favors the Fidelity Investment Grade Bond Fund but also likes dividend-paying blue-chip stocks, such as Johnson & Johnson, Abbott Laboratories, the Coca-Cola Co., Pepsico, Exxon Mobil Corp. and Chevron Corp.
Alternatively, an investor can buy the Vanguard Dividend Appreciation Fund or the iShares DJ Select Dividend fund. Both are exchange traded funds, which trade like stocks throughout the day.
Goodall also recommends T. Rowe Price Equity Income Fund.
Mehta also points to the Pinnacle Value Fund, a mutual fund, run by John Deysher, whom Market Watch designated fund manager of the year 2008.
The finance professor suggests retirees also educate themselves on personal finance.
He teaches fundamentals of investing at UNLV and allows individuals to take the class even if they are not students. For more information, contact the UNLV department of finance.