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By Christine Benz | 06-22-2012 09:00 AM

Key Tools for a Tough Retirement Environment

Sue Stevens of Stevens Wealth Management describes the role of fixed-income, developing-markets exposure, flexible withdrawal rates, and Social Security in today's retirement portfolios.

Christine Benz: I'm Christine Benz for Morningstar.

Retirees face a very challenging environment, including low yields and very high stock market volatility.

Joining me to share some tips on how retirees and pre-retirees can navigate is Sue Stevens. She is CEO of Stevens Wealth Management.

Sue, thank you so much for being here.

Sue Stevens: It’s my pleasure.

Benz: So Sue I outlined some of the big headwinds that retirees are facing right now. You have got yields very low and a lot of market volatility, also the threat of rising interest rates.

So, one thing I'd like to start with is, the historical prescription for a retiree or pre-retiree portfolio is a lot of fixed income. What's your take on how people should approach that issue? Is fixed income still essential to retiree portfolios, and what should the complexion of it look like?

Stevens: Great question. I think fixed income still needs to be a major component of most people's retirement portfolios. I think things have changed a bit in that rates are incredibly low right now, but the purpose of fixed income hasn’t changed, which is stability, some sort of income, something that will keep the portfolio steady and allow people to sleep at night.

So, my approach right now might be to more broadly diversify the types of fixed income that clients are in, maybe pull down what's in Treasuries, push up what’s in corporates, maybe some high-yield, maybe some mortgage-backed to try to get a little bit higher yield, not much, 0.5%, maybe 1%, from what we might've done in the past. But I think that helps create more of a constant return that people are looking for.

Benz: So your thought on pulling down Treasuries at this juncture is mainly a concern about their vulnerability in the face of rising interest rates, or what are you responding to there?

Stevens:  I think Treasuries are an interesting topic. There are kind of two parts to it that I would say: one is the vulnerability that we have massive challenges ahead of us with debt and health-care costs and those types of things that could again pull down the rating of our government debt. So, I think you have to be a little bit thoughtful about, how is that going to work going forward.

But the other part of Treasuries I think is that, they are safe haven. So, I don’t think you can discount them either. I think when we see things happen ... I've heard some people say America's become the new Switzerland. So, people are pushing in to our bonds, in particular, when things go wrong in other places in the world. So, to me, you still want some presence in Treasuries, but maybe just not as much as we had before.

Benz: That was certainly the case in 2008. It was really the only asset class that provided any salvation for anyone. If they had Treasuries, they at least had some of their portfolio that performed reasonably well.

I'd like to follow up with you, Sue, on the role of foreign bonds in a portfolio. That’s been a big buzz at this conference. People have been talking about developing-markets bonds in particular as maybe having better characteristics right now than say developed-markets debt.

What's your take on that question and how much, if any, of your client portfolios are invested in foreign and developing-markets debt?

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