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Diversification key to good retirement

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Now more than ever, diversification is the key to protecting your assets. During the bull market, many retirees chose not to accept recommendations to set aside some of their assets in bonds and cash, thinking that allocation too conservative. But investing mostly in stocks and stock mutual funds, especially in the science-and-technology sector, has proved costly for retirees who initially saw their assets jump. If you invested your nest egg aggressively and are now watching your retirement portfolio shrivel, you may want to rethink your strategy.

Many financial advisers suggest that retirees set aside enough money to fund about three years of living expenses, so that they are not forced to sell stocks in a down market.

"If clients have the money, we commonly recommend that they park three years' worth of living expenses — taxes, trips, vacations, gifts to the kids — in a money-market fund," says Randolph Shine, a co-founder of Shine Financial, in Deerfield Beach, Fla. "Then we allocate the investment side of the portfolio in stock funds, real-estate investment trusts and bonds for the long term."

Retirees with Social Security, pensions or annuities that cover some or all of their normal expenses need less in a money fund to cover the gap.

As bonds or CDs mature, you can use some of the money to replenish the money-market account and maintain the three-year cushion. Keep the rest invested for the long term.

"Be patient and stay diversified," says Sharon Rich, a financial planner with Womoney, in Belmont, Mass. But that doesn't mean stay stagnant. You must carefully monitor your portfolio and rebalance investments if you find that your exposure to stocks is too high.

What if market losses are making an impact on your budget? There are no easy choices. Retirees who find themselves in a cash-flow squeeze must either cut spending or increase income. For example, some retirees are carrying too much life insurance. If your mortgage is paid off and you don't have a taxable estate, you might be able to reduce or eliminate your life insurance premiums.

Or find another source of income. Many retirees are working part-time, not only to stay busy but to supplement their income or pay for discretionary costs, such as travel.