Xpert Speak: Robert Powell, CFP, Editor of Retirement Weekly

1. In the aftermath of the recent crash, there are questions about the normal distribution curve of market returns and what is going on in the left-hand tail. How does this affect my current allocation methodology?

Well, much has changed since modern portfolio theory was modern. Today, investors need to think about all their forms of capital (financial, human and social) as they build their retirement plans. Today, they need to think not only about investing and efficient frontiers, but about reducing, transferring and mitigating the risks of retirement in ways previous generations never had to contemplate.

Last week's events have taught us, if nothing else, about the need to create guarantees, about the need to create a personalized defined benefit plan instead of an undefined benefit plan (which is what we get with 401(k) plans today).

For instance, Zvi Bodie, a Boston University professor and author of "Worry-Free Investing," suggests investing first and foremost in safe investments designed to guarantee an income stream in retirement. He recommends buying Treasury Inflation Protected Securities (TIPS) to cover fixed expenses in retirement and then taking calculated risks in the financial markets, using convertible bonds, principal-protected equity participation notes and the like, to pay for discretionary expenses in retirement.

For those already in retirement, Bodie recommends the use of inflation-protected single premium immediate annuities or SPIAs. Last week's events have also taught us about the need to look beyond asset allocation to something that York University Professor Moshe Milevsky calls "product allocation." Milevsky suggests investing in a mix of assets and insurance products (stocks and bonds, variable annuities with guarantees and lifetime payout income annuities) as a way to create income in retirement.

To be sure, Bodie and Milevsky use different tactics to achieve their results. But neither approach is "more of the same." Both are prescribing medicine to cure what ails us today. And this much is certain: anyone who invested using either Milevsky's or Bodie's approach was less anxious last week than those with a standard 60/40 portfolio.

So what should you do? Surely, don't panic. But do re-evaluate and re-jigger your investment plan. Do consider shifting assets into guaranteed investments and other types of investment and insurance products that reduce the risks of retirement. And do consider talking to a financial professional who has the knowledge and experience that this new world order requires.

These things may go in cycles as Winslow Webber once said, but they don't have to leave your nest egg spinning out of control.

2. Should I count on Social Security being there for my clients?

The bottom line is that average and not-so-average Americans are increasingly dependent on Social Security, but they need to consider ways to reduce their reliance on a system on the verge of great changes.

"Social Security is not sustainable over the long term at current benefit and tax rates," according to the Social Security Administration's report. "Within seven years the program will begin paying more in benefits than it collects in taxes. By 2037 the trust funds will be exhausted. At that point, payroll taxes and other income will flow into the fund but will be sufficient to pay only 76% of program costs."

So, what's the takeaway for you? First, if you haven't done so already, it's time to consider what percent of income Social Security will represent in your retirement plan and to consider what percent you want it to represent.

3. If that's the scenario, what advice can you offer about replacing lost retirement income from Social Security?

You should certainly factor working into your retirement-income plan but, given the possibility that you might not work in retirement, plus the fact that it now represents almost a third of the average retiree's income, you need to consider other options to replace that source of income should your best-laid plans go awry.

What are those other options? Basically, there's one. Income from assets represented just 16% of the average Social Security beneficiary's retirement income pie in 2007. In the future, the percent of income that comes from financial capital, including IRAs, will likely have to rise. That's especially so if 65% of the average retiree's income plan is at risk, if the 29% of income you were expecting from working in retirement falls through and the 36% of income you were expecting from Social Security goes away.

Yes, it's time to save like crazy because there are no guarantees when it comes to your retirement income plan.

 

Read more about Robert Powell on his bio.