AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

I'm 64, in good health and due to retire in 5 months.  (The timing is unfortunate, but at this point we intend to stick to our schedule.)  My wife is 56 and in good health.  Our retirement savings total $2M.  Due to a recent inheritance, plus a nice return on an investment, half of our savings is cash, 70% of which is currently in a Vanguard Tax Free Money Market Fund (today's yield 4.67%), and 30% of which is in a private taxable account that as of today is earning 4.4%.  Half of the remainder of our savings is invested in various, reasonably diversified Vanguard funds (where it will stay), and the other half in Vanguard's Total Bond Index Fund.  So, overall, a conservative position at the moment.  Given the current economy and stock market craziness, we are tempted to maintain our current positions until the economy and the market sort themselves out a bit more.  Is that a reasonable strategy?  If so, how do we best go about determining when to begin switching to a more balanced position, one that we will need to sustain our retirement?        

I haven't found anyone with a good crystal ball in 40 years of writing a newspaper column and books, so we're all dancing in the dark.

Here, however, is what I think you should be concerned about. So far, our government bailout actions have been done by floating new Treasury issues rather than printing money. That means we still don't know whether the future will contain continued deflation of financial assets or a switch to monetary inflation that will drive the value of bonds down and the value of hard assets, and the assets owned by corporations, up. That tells me that being in cash is pretty dangerous.  Remember, the only reason your tax free money market fund is yielding 4.67 percent is that the municipal market has suffered cardiac arrest and is no longer functioning--- that's why Schwarzenegger has talked about a federal loan for the state of California.

As a consequence, you should consider moving a good deal of that money to a lower yielding, but safer investment. That would include a short term Treasury ETF, ticker BIL. You might also consider investing some of your money in TIPS, particularly if it is in a tax deferred account. Currently, the coupon return on short term TIPS is under 1 percent but with a trailing inflation rate of nearly 6 percent the return will still beat the return of comparable maturity coupon Treasurys cold.

Scott