A Smarter Retirement Plan

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OCEAN CITY – Fed chairman Ben Bernanke predicted in May that the recession could end by the close of 2009, citing encouraging signs that distressed markets may finally have reached their bottom. Although stabilization will come at some point, it’s equally clear that recovery from the most severe economic crisis since the 1930s will take time and carry its share of challenges. One of the most important assessments for investors — especially those nearing retirement — will be choosing which assets to tap to meet living expenses, and in what order, says Tom Latta, Director of Investment Management and Guidance for Merrill Lynch. Despite hopeful signs, assets’ values remain depressed, and lines of credit are still tight, which means that ensuring cash flow requires careful planning.

“In this environment, there are two primary concerns,” Latta says. “First, is your portfolio at an appropriate level of risk? Going through this crisis has caused many people to alter their views fundamentally. Second, what is your planning period, what are you planning for, and how much does your portfolio have to appreciate to make that plan happen?”

The outcome of this analysis might mean a shift from aggressive, small-cap equities toward fixed income investments and dividend-paying stocks, Latta says. This approach can help generate regular income while still leaving you invested in the market. But no matter what decisions you make, Latta advises that a gradual approach to rebalancing is preferable to wholesale changes.

Another point to consider: Although a fear of turbulence is normal, it’s important not to abandon growth. “Harvesting your assets too early or devoting too much of your portfolio to simply preserving capital can be counterproductive,” says Aimee DeCamillo, Managing Director, Head of Personal Retirement for Merrill Lynch. Given that Americans on average are living longer, you may have to finance a retirement lasting decades. Equities that seem like a drag on your portfolio in a depressed market may in fact provide a foundation for relatively stable income long after this recession has taken its place in the history books.

After you rebalance, it may be best to draw on taxable portfolios for income first, DeCamillo advises. “That way, tax-advantaged plans such as 401(k)s and IRAs have an opportunity to recover along with the economy and retain the potential to grow tax-deferred,” she says. “People may also want to think about making asset allocation adjustments in their tax-deferred plans to avoid further erosion from current income taxes.”

This year it became easier for retirees to keep the same amount of money saved in these tax-advantaged plans. Investors are normally required to begin taking regular withdrawals starting at age 70½, but in response to the financial crisis, Congress suspended those requirements for 2009.

Once you have decided which portfolios to tap, it’s vital to seek out advice on which assets within those portfolios to hold and which to sell. “If you own high-quality stocks that have dropped mainly because everything else has, they could rebound right along with the economy and provide healthy growth,” Latta says. But you might consider selling out-of-favor equities — such as small-cap growth stocks — even if the price isn’t as high as you would like. A final consideration, of course, is factoring in which investments carry the lowest cost to convert to cash. Taking income from a bond that has reached maturity is preferable to selling before it matures, since selling early may include penalties.

Decisions to hold or sell assets inevitably require you to balance your immediate cash requirements with the need to avoid outliving your investments. A total assessment of your retirement picture can position you for the short term as well as for the recovery ahead.

All sector and asset allocation recommendations must be considered in the context of an individual investor’s goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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