The Bond Issues

The Good News: You're sleeping better than ever since you moved all your retirement money out of stocks and into bonds.

The Hidden Risk: You're approaching two land mines here. First up is inflation. Make it to age 65 and there's a good chance you'll live another 20 years or longer. (More on this in the next item.) Over a 20-year period, a 4 percent average inflation rate (the historical norm since the '50s) will reduce the purchasing power of today's dollar to about 50 cents. That will make it very hard to maintain your standard of living in retirement. Bonds aren't an ideal inflation hedge, since their historical returns are typically not much better than the inflation rate. Making matters worse, because of the financial crisis and the Federal Reserve's efforts to keep the economy growing, bond yields are at unprecedented lows. This is not a permanent situation. Soon—maybe this year or next—interest rates, and thus bond yields, will start to rise. When rates rise, the market price of bonds falls. That hurts your portfolio.

How To Stay On Top: Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won't grow any faster than the rate of inflation. As a general rule, your age is a good guideline for the percentage of bonds you want—if you're 55, put 55 percent in bonds and 45 percent in stocks. If you're worried about putting money in stocks right now, stick with mutual funds or exchange-traded funds (ETFs) that focus on dividend-paying stocks. The dividend payout is a steady stream of income, much like a bond, and right now the yield on some dividend portfolios is actually higher than the yield on a five-year Treasury bond. While dividend stocks have their own risk, if you have time on your side—at least ten years—you can pocket that nice dividend income today, ride out the volatility, and, over the long term, potentially earn inflation-beating gains.

Live Long—And Prosper? How to Enjoy a Long, Comfortable Retirement

The Good News: You're likely to reach a much older age than women of previous generations. Today a woman of 65 will probably live 20 more years—60 percent longer than her life expectancy in 1900.

The Hidden Risk: That means more years that your 401(k) and IRA need to support you.

How To Stay On Top: To enjoy a long, comfortable retirement, save more today. If you're 50 or older, take advantage of the catch-up provisions: Instead of an annual 401(k) max of $16,500 in 2010, you're entitled to invest $22,000, and your IRA limit rises from the standard $5,000 to $6,000. You may also want to retire later. Working until 67 or 70 gives those funds more time to grow—which gives you more security. You don't have to keep the high-powered career you have now; a less demanding job will still bring in valuable income.

How to borrow and figure out what you can afford to spend


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