MarketWatch: Quick ways to rebuild retirement portfolios

SAN FRANCISCO (MarketWatch) -- Jo and Al Lineberry were expecting a smooth and stress-free retirement when life intervened.

Two years ago, the Lineberrys were corporate executives in Minneapolis
with successful and lucrative careers. Then Al was laid off, and Jo
lost her job nine months later. Today, Al's new job pays one-third of
what he used to make, while Jo is employed part-time.

Where the jobs are for older workers

Older workers' unemployment rate is lower than the national average,
but it often takes them longer to find a job. Kerry Kiley, a regional
manager at staffing firm Adecco, talks about which industries are
hiring. Stacey Delo reports.

Like millions of Americans who have painfully
watched their home's value collapse and their 401(k) crumble, the
Lineberrys are being forced to make major lifestyle changes they never
imagined.

"We didn't have to worry too much about money," Jo said. "Now, if we
can't pay cash we don't buy it. We have taken no trips at all. We'd
always go out to the nicer restaurants; now it's Red Lobster, Olive
Garden -- with coupons."

Critics might be quick to say the Lineberrys brought this on
themselves, with their fancy dinners and frequent vacations. Except
that in planning for their financial future, the couple was doing
everything right. They'd diligently paid off their mortgage and didn't
tap the home equity to buy more things. And they'd been textbook
savers, maxing out 401(k) contributions so that Jo, 51, and Al, 60,
could retire early.

That goal is most likely out of reach for the Lineberrys. But they do
have options: Spend less; work longer; save more; take greater
investment risk, reassess financial goals.

Indeed, those are the basic choices for anyone close to retirement or
already retired who hopes to rebuild their investment portfolio. Maybe
they're not ideal, but they are the new reality for people who've been
hit with a series of body blows in a short time. See MarketWatch's complete coverage of Retirement in Peril.

"The game has changed," said Nathan Dungan, founder of counseling firm
Share Save Spend, which teaches families about money matters. "People
say, 'I was on track. I was doing everything correctly, and the bottom
dropped out. Through no fault of my own, I am now in this difficult
spot."

Difficult -- and shocking. At money and investing seminars, Dungan
directly confronts people's feelings of helplessness and loss, bringing
up the five established stages of grief -- denial, anger, bargaining,
depression and acceptance. "These are tough things to face," he said,
"but facing them and getting a plan of action is empowering. It's when
we don't face it that anxiety continues to build and our situation
doesn't get any better."

What can you do? Look backward -- not to regret but to remember how it
felt to experience terrifying volatility and uncertainty as the
financial markets melted down. Then live forward -- think hard about
what you hope to have in coming years and map out how to get there. If
that dream involves more risk than you're willing to take, you'll
either have to scale back or extend your horizon.

Replacing lost wealth

It's natural when you lose money to want to make it back. Research
shows that the pain of financial loss is much more acute than the
satisfaction of a gain. Losses of course are particularly hard on
retirees, who no longer have the time to recoup them and need regular
income from a portfolio.

Pressing needs often lead to unrealistic expectations. "People come to
us and say 'You fix it; I want you to take more risk to get me a higher
return,'" said Scott Kays, an Atlanta-based financial adviser.

"Taking too much risk is what got them in trouble," he added.
"Sometimes advisers are tempted to take too much risk to help the
client get that money back faster. It's a trap for clients and
advisers. The steps I'm going to take are no different than I would
take for someone just building their portfolio."

Do you really want to know the quickest ways to replace lost wealth?
It's not by pouring money into stocks or other speculative investments.
The answer is to follow a financial plan that brings down the cost of
your lifestyle.

"Retirement is a cash-flow issue -- how much do you need every month
after taxes?" said Jonathan Guyton, a principal at Cornerstone Wealth
Advisors, Inc. in Edina, Minn.

"Anything we can do to increase your after-tax wealth or lower the cost
of your after-tax lifestyle," he said, "puts less pressure on what you
have to do to be ready."

Consider this: Every $100 a month in expenses requires $25,000 in
assets, assuming that you are spending 5% of your portfolio. If you can
reduce expenses by $100 a month, that's $25,000 less you need in your
nest egg.

You can also keep working -- and it wouldn't take much. Suppose your
$500,000 retirement portfolio is now worth $400,000. If you can earn
$5,000 from part-time or consulting work, that's equivalent to $100,000
in portfolio assets. That $5,000 replaces the lost $100,000 from a
spending perspective.

"You can have a much bigger impact on your long-term financial security
by looking at opportunities on the planning side," Guyton said. "If
you're only looking at your portfolio, you're going to miss a lot."

Refinancing a mortgage at today's low rates, for example, can save
money without a change in lifestyle, Guyton said. If you're able to
trim, say, $400 a month in payments, that's more than $100,000 in
assets you won't have to accumulate.

"By making that structural change in your plan, you can have that
lifestyle for $400 a month less," Guyton said. "What could you do with
that extra $400 a month?"

Investment options

You could -- carefully -- put some of that surplus cash into stocks and
bonds. After all, retirement portfolios still need long-term growth in
addition to income. Just be sure to diversify and take appropriate
risk.

Dividend-paying stocks are attractive nowadays, said Kevin Ellman, head
of investment advisory firm Wealth Preservation Solutions in Ridgewood,
N.J. Many of his retired clients are in dividend-rich exchange-traded
stock funds from providers WisdomTree Investments and Vanguard Group.

"We're generating a good income stream and not giving up the
opportunity for equity growth," he said. Dividends, he added, act as a
cushion so people "don't feel quite as anxious. It gives them more
staying power to hang through the ups and downs of the equity market."

Kays, the Atlanta adviser, said he expects short, powerful bursts from
stocks, with subsequent retreats, over the next several years. Such a
fitful market, he said, requires investors to be proactive and to
consider untraditional areas.

"In this sideways market, you can still make a profit but you may have
to look at a higher position in commodities, inflation-sensitive
investments and hedge fund strategies," he said.

Kays said he's particularly interested in mutual funds that use hedging
tactics, noting they are more transparent and easily traded than hedge
funds, and are also cheaper to own and to buy.

These products offer much greater diversification than even a
well-shuffled portfolio of stocks and bonds, he said. Two funds on his
list: Absolute Strategies Fund /quotes/comstock/10r!asfi.x
(ASFIX
10.40,
0.00,
0.00%)
and Aston/New Century Absolute Return ETF
/quotes/comstock/10r!anenx
(ANENX
9.35,
+0.08,
+0.86%)
.

With bonds, Kays is concerned that renewed economic growth will spur
inflation, so he's invested client portfolios in higher-quality, short-
to intermediate-term corporate bond funds and inflation-protected
securities funds. These include: Vanguard Short-Term Investment-Grade
Fund /quotes/comstock/10r!vfstx
(VFSTX
10.52,
0.00,
0.00%)
; Vanguard High-Yield Corporate Fund
/quotes/comstock/10r!vwehx
(VWEHX
5.29,
+0.01,
+0.19%)
; Vanguard Intermediate-Term Investment-Grade Fund
/quotes/comstock/10r!vficx
(VFICX
9.58,
+0.02,
+0.21%)
, and Vanguard Inflation-Protected Securities Fund
/quotes/comstock/10r!vipsx
(VIPSX
12.44,
+0.03,
+0.24%)
.

In keeping with his cautious outlook, Kays said the stock market's
six-month surge is near its end, and he's taken some chips off the
table.

"We've experienced the vast bulk of returns we're going to get," Kays
said. "It makes sense to start cutting your risk. If this party is over
at midnight, I don't want to get to the door at 11:59. We may be early,
but better safe than sorry."

Jonathan Burton is an assistant personal finance editor for MarketWatch, based in San Francisco.