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With an unsettled economy, an abundance of political spending and retirement anywhere from seven to 20 years away, aging baby boomers are starting to wonder if they will be able to retire in the style they once thought possible. Studies show that 41 percent of baby boomers worry about having to return to work during retirement to make ends meet. Since many baby boomers have invested heavily in mutual funds and with more than 88 percent of mutual funds failing to beat the S&P 500, many baby boomers fear they won't have enough money in their retirement years. So what's an investor to do? Consider this, instead of loading up on fixed income investments, a better choice to reduce risk is to establish a well-diversified portfolio, which offers baby boomers the right balance of growth, income and safety.

Traditional Thinking

The old school of thought was to invest heavily in CDs and bonds as you got older, but what people fail to realize is that in the past those safe investments were still fairly lucrative. Today, after factoring in inflation and taxes, a 3 percent bond or CD will actually be a poor choice and will not produce the income needed for the longer retirement most boomers are anticipating.

Diversification

It's important to diversify your portfolio. Many people don't know what true diversification means. Diversification is a word loosely thrown around in the investment community; however, few financial advisors take the time to define true diversification. To have your investments last, it's so important to get the right balance between risk and return, yet most investors have no idea how to accomplish that. In many cases, investors may think they are diversifying. But in actuality, they are not. For example, an investor's portfolio may include a fund like Fidelity Magellan, a technology fund and additional investments in the S&P 500. This investor may think he was diversifying, but these funds are likely to hold the same companies, such as Microsoft, Cisco and Intel. Investing in three large cap funds is not diversification. If you are investing in a variety of funds, make sure there is minimal or no duplication in the companies held within the funds.

Your Profile's Volatility

Lowering your portfolio's volatility is also important. For example, choose investments with dissimilar price movements. Invest in a variety of different holdings that move in different directions and magnitudes to reduce portfolio volatility. One method, known as the index-fund strategy can be used for stock portfolios. The guidelines are straightforward:

• Invest in a globally diversified portfolio.
• Don't try to "beat the market." Choose low-cost, no-load stock index mutual funds of dissimilar price movementÑtypes of stocks that don't all go up or down at the same time or at least not by the same amount.
• A sample portfolio might include:
  x percent in fixed income investments; x percent in total U.S. Market, like the Wilshire 5000 Total Market Index;
  x percent in U.S. large cap fund;
  x percent in U.S. small cap fund;
  x percent in international large cap fund; and x percent in International small cap fund.
• Don't manage the funds. Instead, rebalance the portfolio yearly or at a pre-determined interval to keep the intended percentage mix, because if you don't rebalance your investments, a particular asset class may grow to dominate the portfolio.

The theory behind passive investing is that if you can't beat the market, join it with a logical and low-cost index approach.
When measured against active management, passive investing seems very logical, and it's successes are proven. However, many investors choose not to follow this strategy. Why? There are several theories: People think they can beat the market and though the method is academically based, it's not taught in most college finance courses; plus, if the financial media didn't write about new, hot stocks and investment ideas each month, what would they have to report?

So passive investing may not be the most exciting method of investing or the most talked-about method, but it's certainly the most prudent. So keep your investments passive, and save the active behavior for your retirement lifestyle.

Plan and Enjoy Your Retirement

Remember the saying, "I was so busy making a living I forgot to have a life." Slow down. Prepare to enjoy your retirement. And remember, if the adage in real estate is location, location, location, then it's plan, plan, plan every year for your retirement. Be patient! Never stop planning for your future.

Create Financial Freedom for Yourself in the Golden Years

• Invest as if you are going to live much longer than you think. The average lifespan of an American is continuing to increase in age with each generation, with an 80+ year average lifespan. Keep in mind, this is an average. Some of us will not make it to 80, while others will live to be 100+.
• To help preserve your assets for as long as possible, spend all of your non-IRA money before your IRA money. Take your spending money from non-IRA assets. That way, no federal tax has to be paid, and the only income taxes you pay are on the distributions you take to live on.
• A well-diversified portfolio will produce better returns and limit risk more efficiently than opting for a portfolio heavily weighted in fixed income.
• It's important to understand what a diversified portfolio really means.
• To help your assets last for as many generations as possible, take advantage of the stretch IRA. The stretch IRA is not a financial product, but a planning strategy that allows for the deferral of tax on the assets accumulated in your IRA. This is accomplished by allowing the IRA's required minimum distributions to be stretched out over the owner's lifetime and possibly the beneficiaries' lifetimes, before all the assets in the IRA are required to be distributed.
• Check all cash values in your life insurance policies. Taking cash from your life insurance policy to assist with your income needs is considered a tax-free loan.
• Invest in long-term care health insurance. If you fall ill, you don't want all of your retirement savings going toward your health care. A long-term care health policy will contribute to the cost of your care, thus protecting your other assets.
• Continue to save while in retirement.
• Always understand investment fees and never buy a new issue from a broker who tells you there are no fees.
• Don't underestimate the amount of money you will need to retire. Sit down and figure it out. It is very important to understand what type of return you need to achieve the income necessary to have your assets last.
• Don't base your investment decisions on emotions. Use your intellect.
• Don't pick a mutual fund based on last year's performance.
• Always know your risk tolerance and understand the amount of risk in your investment portfolio.
• Don't put all of your money in short-term "safe" investments yielding less than inflation.
• Banks are NOT the only safe place to invest your money.
• It's very important that you have PROPER and effective wills and trusts set up.
• Enhance the quality of your life and investments by delegating your financial planning and management to a qualified professional whom you trust. Choose a financial advisor who offers at least five referrals. And, consider hiring a fee-only financial planner who, like an accountant or attorney, is paid a flat fee. This type of financial consultant does not work on commission; they work for you.