Carrie Schwab Pomerantz

Dear Carrie: This market has taken a huge bite out of my wife's and my retirement holdings. Fortunately, we moved our funds last October into government bond funds, but even these have not held up well. Since we are both retired, in our late 60s, we wonder what we should do next. Generally, for those of us who are retired, with retirement holdings that this economy hit hard, where should we go from here to protect our finances? -- A Reader

Dear Reader: It certainly sounds like the move you made last summer was extremely fortunate. Even though the short-term result of investing in government bonds may not have been as secure as you anticipated, you're probably in a lot better shape than folks who remained heavily invested in stocks. So that was mostly a good thing-- you just got caught in unusual circumstances.

The unfortunate part is that most government bonds owned debt in Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) and have done poorly as a result of the current mortgage market. The good news is that the actions the government initiated in September 2008 to support these companies were designed to help turn this around. But that's history. Now it's time to look ahead.

Three steps

As you probably know, one common way to protect your money is to put it in FDIC-insured investments like CDs or government-backed securities like Treasuries. However, these investments have the drawback of currently offering extremely low returns. And considering that you may have another 20 years or more ahead of you, depending on your personal situation and tolerance for risk, you might want to consider balancing safety with growth. So here's what I suggest:

1. To make sure you always have cash on hand, I believe it's important to keep enough to cover one year's expenses in a money market account or short-term CDs. This way you will be less likely to have to sell longer-term investments at the wrong time to handle a current need.

2. Next, consider putting two to three years' worth of expenses in conservative, short-term bonds. Again, you're not risking money that you may need in the near future.

3. Finally, consider allocating the rest of your portfolio to allow for some growth. For example, you might consider putting 1/3 in stocks and the remainder in bonds.

Choosing bonds

Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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