"I am on the brink of 60 -- unemployed with weak prospects for work in the near future," a California reader writes.
"When I became unemployed, we pulled out most of our funds from Vanguard -- i.e., Star, Wellington, Health, Windsor and Windsor II -- being afraid of the market and trying to preserve our capital.
"Now, the banks are paying less and less in interest, and we really do not know what to do to tide us over until I'm able to obtain work until 65 for Social Security."
If you lost your job, would you find yourself in a similar situation?
Layoffs and involuntary early retirements didn't start with the 1990-1991 recession. They were a common consequence of mergers, acquisitions, corporate restructuring and business failures during the economic expansion that preceded it.
Nor are they likely to end with this recession. Corporate pressure to improve profitability by cutting payrolls is likely to endure after the recovery gains momentum.
Today, you might not be able to imagine losing your job, whether during recession or recovery. Still, you should take a look at your fund investments, both inside and outside IRAs, as well as your other financial assets.
See whether they're appropriately deployed to help you both to meet short-term financial needs, in case the unimaginable event occurs, and to achieve long-term goals.
In reviewing your financial assets, it may be useful to think of them in three groups:
1. Readily available assets, including equity mutual funds and taxable or tax-exempt money-market and bond funds whose shares you can redeem any day. If your equity or bond fund
shares are worth more than their cost, you'd owe taxes on your capital gains. If they're worth less, you'd have losses but could use them to reduce taxable income.
2. IRAs (or other tax-sheltered retirement accounts), including those invested in money-market, bond, or equity funds whose shares you also could redeem any day and from which you can make withdrawals. Except when withdrawing non-deductible contributions, you'd owe income taxes on the total cash taken out, regardless of whether the investments made or lost money. If you withdraw before you're 59 years old, you'd probably owe another 10 percent tax.
3. Your balances in profit-sharing, 401(k) or other employer plans that you might receive in case of termination or retirement.
If your total in the first group is substantial, you might be able to leave assets in the other two groups intact, should you become unemployed. This would permit them to continue growing until you have to rely on them for retirement income.
If not, you'd need to study which of the other assets you could tap most advantageously.
In the first group, you'll want enough in cash equivalents, such as money-market funds, to supplement whatever severance pay, pension, unemployment compensation or other income you might receive. Make sure you can cover living costs for three to six months.
Because taxable money-market yields are only 4 percent to 5 HTC percent these days, you might put part of your "rainy day" money into taxable or tax-exempt short-term bond funds, which pay more and involve relatively little market risk.
Whatever you do, try to avoid the risk that, feeling desperate and needing cash, you'd be forced to redeem shares of well-run balanced or equity funds, absorbing losses or having to pay capital gains taxes. The rest of your fund portfolio outside IRAs and employer plans could be divided among intermediate- or long-term bond and equity funds in accordance with your preference between income and capital appreciation, your risk tolerance and your tax bracket.
If you're 60 and capital preservation has become an important priority, you'd probably want to be in less volatile bond and equity funds -- say, intermediate bond (including GNMA), growth and income, equity income and/or balanced funds.
If you're 35, your longer investment horizon would permit you to have a more growth-oriented portfolio, including aggressive growth and growth funds, but you also might consider a bond fund.