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By Christine Benz | 01-24-2011 10:00 AM

Retirement Planning: Opportunities and Challenges Today

Morningstar's Christine Benz discusses retirement portfolio planning strategies and pitfalls with T. Rowe Price senior financial planner Christine Fahlund, noted advisor Mark Balasa of wealth management firm Balasa Dinverno Foltz, and Morningstar Investment Services' Jeff Ptak.

Benz: Hi, and welcome to our live webcast, "Portfolio Planning in Retirement Opportunities and Challenges Today."

I'm Christine Benz, director of personal finance for Morningstar.

I'm pleased to say that we are joined here today by three experts who are going to help us tackle some of the challenges facing retirees, and also pose some practical solutions.

Here joining us today is Mark Balasa. Mark is principal and co-founder of the firm Balasa Dinverno & Foltz. Mark is a long time friend of Morningstar and has been named seven times as one of the Best Financial Advisors in the U.S. by Robb Report Worth magazine. Mark, thanks for being here.

Mark Balasa: Thank you.

Benz: We also have Christine Fahlund here from T. Rowe Price. Chris is a senior financial planner and vice president for T. Rowe Price Group. Chris specializes in the areas of retirement accumulation strategies, retirement distribution planning and estate planning. Chris, thanks for being here.

Finally, we have Jeff Ptak here from Morningstar Investment Services. Jeff is president and chief investment officer of that group. Morningstar Investment Services creates and manages Morningstar managed portfolios, a suite of products that includes a retirement income series of portfolios. Jeff, thanks for being here.

Jeff Ptak: My pleasure.

Benz: So we have a lot of ground to tackle today. We are going to talk about navigating retirement given the current fixed-income environment and what to do with your bond portfolio.

We'll also talk about setting the right asset allocation in retirement. And I am hoping that we'll also have time to discuss some peripheral retirement income strategies, such as maximizing Social Security, as well as the role of annuities in retiree portfolios.

Toward the end of this session, we will take some questions both from our online audience and from our live audience here at Morningstar headquarters. So we will dive into some of those questions later in the session.

To kick things off, we're going to take a look at a clip with one of our Morningstar.com users, a premium user, Bill Buerstatte. He is a new retiree. Let's take a look at the clip.

Video Clip: Hi. I am Bill Buerstatte. I've been a Morningstar client for about three years now. I just recently entered retirement, six months ago, in July of 2010. As a fairly recent retiree, one of my interests, of course, is concerned with fixed income. And it's no secret, we've had pending rising rates going on, prospect of inflation, and some of the uncertainty in muni bonds, and the like. So, I'd like to get the panel's advice on what should be my best strategy for fixed-income investing. So, any advice you might have on protecting against interest rate risks or specific allocation directions would be very helpful.

Benz: Terrific question, obviously. I think this is a question that's top of mind with so many retirees and pre-retirees today. Mark, let's talk about the practitioner's perspective on this question. I'm sure you're getting it a lot. You told me you're getting it a lot from your clients. What are you saying and what are you doing to protect client portfolios in the face of what could be rising interest rate risk?

Balasa: Sure. I mean, to your point, in all of the years I've been in business doing this, without a doubt, it is the most questions I've ever gotten about bonds. And it makes sense, right? If you think about interest rates, they've been falling since the early '80s. So, we've had a 30-year tailwind for bondholders, right? Because as interest rates fall, that's good for bonds and vice versa is true. So, the 0% or 25 basis point Fed fund rate, everyone expects rates to go up.

I was in Newport Beach the week before Christmas at PIMCO's offices, and so we heard a day and a half's worth of conversation about PIMCO's views about rising rates. In their view, and of course, it's only one view, but it's an educated one, they felt that it wouldn't happen until later 2011, maybe even as far as early 2012.

So, part of their advice was to be sensitive and aware of the fact that rates are going to go up, but don't react too quickly and too dramatically. ... One of the natural things to do to insulate and inoculate your portfolio is to shorten durations and raise the credit quality. Their point is, if you do that too quickly and too drastically, remember the yields on the short end of the curve are very low. So you think about your money market right now. Do you want to have your money making no return. So you have to weigh the strategies that you are going to employ in your fixed-income portfolio.

But I'll leave some more for the rest of the panel, but I'll just make one point, the obvious one is that as we go forward in 2011 to think about what's the average duration or the average maturity of your bond portfolio. Again, the farther out you are, the more volatile the reaction is to a rising interest rate environment.

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