In taking stock of your retirement needs, don't neglect inflation-fighting equities


A 62-year-old advertising executive retired recently from his firm in New York and walked out with several hundred thousand dollars in retirement savings and severance.

"He came to me without owning a single share of stock," says Steven Enright, a Westwood, N.J., financial planner who took him on as a client. "All his money was in cash or fixed-income investments. We had to drag him kicking and screaming into equities."

The client now has about 30 percent of his money in a few equity mutual funds, Mr. Enright says.

The retiree's attitude toward stocks is not unusual. Many people believe that when they retire, their days of "playing" the stock market, even through mutual funds, are over.

They shouldn't be. To provide long-term growth and to make sure their money keeps up with inflation, at least 30 percent of a retiree's assets should be kept in stocks or stock funds, financial advisers say.

And for those taking early-retirement "buyouts," the percentage put into stocks should be even higher. If a person is retiring at 55 but plans to work at least part-time after that, he should have as much as 50 percent in high-quality stocks or mutual funds, says Andrew Cooper III, senior vice president at Shearson Lehman Brothers and head of a retirement planning group at the firm.

Once a steady paycheck is no longer coming in, most retirees want to preserve every cent they have, with a heavy emphasis on Treasury securities and certificates of deposit. If they're daring, they might buy some corporate bonds from big-name blue chip companies such as General Electric, GTE or IBM.

That might have been a good idea in the past, but the recent decline in interest rates has kicked many of those notions in the shins.

The recent Federal Reserve cut in the discount rate to 5 percent, followed by cuts in the prime lending rate by major banks, was supposed to be a boon to borrowers who have been waiting for lower rates before making big purchases, buying homes or expanding factories.

That may happen, but in the meantime, lower interest rates also mean lower payments from fixed-income investments, including corporate and municipal bonds and Treasury securities. For people who depend on those payments to make ends meet, last week's news from the Fed was not good at all.

Lower rates also mean lower yields on CDs at banks. Three years ago, recalls Kevin Whalen, a financial consultant at Shearson, some new retirees from a Boston-area company were debating whether to buy five-year CDs at 9 1/2 percent or one-year certificates at 10 percent.

"It split about 50-50," with half opting for the one-year CDs at 10 percent, Mr. Whalen says. Last year, however, those people had to roll their CDs over into 8 1/2 percent yields; this year they're looking at returns of around 6 1/4 percent.

The other half of the retirees, meanwhile, are still earning 9 1/2 percent. Those people, of course, made a correct guess on interest rates. While others might not want to play that game, they could buy different CDs in different maturities.

"The most conservative portfolio is a well-diversified portfolio," says Marc O'Brien, president of his own money-management company in Cambridge, Mass. For his recently retired clients, Mr. O'Brien recommends putting up to 60 percent or 65 percent of their money in no-load equity mutual funds, such as Harbor International, for global exposure; Pennsylvania Mutual for investing in small companies; Gabelli Growth or Gabelli Asset fund for growth; and T. Rowe Price Equity Income fund for growth and income.

Some people might find 65 percent in equities a bit daring, but Mr. O'Brien's theory is based on life expectancies. Today's 62-year-old has a reasonable chance of living another 30 years, he notes. That leaves a lot of room for changes in the purchasing power of a dollar. Pay increases helped people keep up with inflation while they were working, but they will need stocks to do it after retirement, Mr. O'Brien says.

"On the day of retirement, you're embarking on a 30-year investment program," Mr. O'Brien says. "You need to think in those terms."

For some other people, though, 60 percent may be more than they can handle emotionally.

"If 35 percent in stocks meets the client's cash flow needs, and if he's comfortable with that over the next 10 years, I'd stick with that," Mr. Enright says. A stock portfolio should be left pretty much untouched for eight to 10 years, he says, adding, "You should take that money and think of it as a 10-year stock CD. Most people who are retired aren't comfortable doing that with more than 30 or 35 percent."

"People have to be careful that the money they put into stocks won't be needed quickly," says Edith Tucker, editor of United Retirement Bulletin, published by United Business Services. "The money they might need in six months to a year should be more liquid."

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