Weighing Retirement Investment Risks

Whether you’re building a nest egg for retirement or sitting on one as a retiree, you have to weigh the risks that always go with any kind of investment.

Everyone knows that high-flying, volatile stocks are risky because their prices go up and down at a dizzying rate.

But what about the “invisible” risks of fluctuating interest rates, poor liquidity (not being able to get your money out) and inflation?

Peter Nagan, a bond and money market specialist and author of “Failsafe Investing” (Putnam), tells about a major American corporation that came out with its first bond issue. The bonds were rated AAA--the best.

Perfectly safe? For a few months, yes. But then interest rates started climbing and the price of the bonds plummeted. The same goes for good old U.S. Treasury offerings, backed by the government. But when interest rates go up, the price of the Treasury offerings must go down because you have to sell them at a discount to get anyone to buy (they want the newer, higher-interest investments).

Cornelia Small, a market forecaster for Scudder mutual funds, talks about other risks. “Some people,” she says, “regard gold as the safest haven in a world of monetary instability.” But, she points out, people who bought gold in 1980 watched the price drop from $850 an ounce to a current price in the $300 range. How’s that for a risk?

An unexpected decline in income is also a risk--especially for retired persons. Several years ago, forecaster Small reminds us, many retirees came to rely on the unusually high interest rates paid by savings certificates, money market funds and U.S. Treasury offerings. Then short-term interest rates declined sharply and these dependent investors had dismaying drops in income.

People who are trying to build a future retirement fund, Cornelia Small warns, “face the risk of lost opportunity.” By this she means investing too conservatively--for safety--and missing out on much bigger long-term growth mutual funds.

For example, if you invested $10,000 in a long-term bank certificate 10 years ago, your principal would still be $10,000. If you invested in something that just made the stock market average, your principal would be worth $23,000 today.

Investment author Nagan was asked what he thought retired people might do with their money in the coming year. “The stock market looks iffy,” he says, “but bonds look good--at least for a good part of next year.”

You should look for something that pays a competitive interest rate and that has a ready market if you want to bail out. This way you can keep an eye on risks involving inflation, interest rates and liquidity.

Question: We are thinking of selling our home. We are both retired and want to move to a smaller, more manageable place. Our question is: What would be the best thing for us to do financially--pay cash for the new home, get a mortgage loan or rent?

We have a nice combination of retirement incomes from pensions, investments and Social Security, and we paid $1,400 in federal income taxes last year. We have no outstanding debts.

Answer: Unless there are certain “life style” exceptions, you should buy your new home with a mortgage loan. You might be able to wipe out most, if not all, of that $1,400 tax bite.

Sure, you’ll suddenly have a big monthly loan payment to contend with. But remember, you’ll also have a lot of cash from the sale of your current home. You can invest your profits from the sale and should be able to handle the monthly payments with ease.

The big interest payments that you’ll be making on your loan are tax deductible, and your property taxes will be tax deductible as well. Check this out with a tax accountant or with some of the mortgage lenders in your area.

As far as mortgage interest rates are concerned, the experts feel that now is a good time to borrow. Rates may start going up later on this year.

As far as renting your next home is concerned, this depends a lot on your life style or goals. If you plan to move around a lot or spend a lot of time traveling, you might want to rent a modest home on a one-year lease basis. This would give you more freedom to pull up stakes when you felt the urge to try someplace new.