Dude, Where's My IRA?

The experts still tell us we should allocate our retirement portfolio to 60% stocks, 40% bonds, give or take, depending on your age.

But how does a sensible investor do that in this era of zero percent interest rates? Do bonds really have a place in your portfolio anymore? It's a reasonable question to ask.

If you put 40% of your money in safe (i.e. U.S. Treasury) bonds that are unlikely to default, it's essentially dead money, unless you're okay with earning less than 2% a year over the next 10 years.

If you want to earn more than that, you'll have to go way out on the risk curve. And if you're going to do that, you're probably better off putting your money in blue-chip equities or ETFs that pay high dividends. They're arguably safer than junk bonds, and the dividends will cushion your portfolio if stock prices go down.

But then there goes your diversification. You'll have 100% of your portfolio in equities. What happens when the stock market finally corrects? Will your bond portfolio save you? Of course not, since you won't have one.

Let's say you do stick to the traditional asset allocation formula and put 40% or so of your money in bonds. Most of us would agree that interest rates have no place to go from here but up, meaning the asset value of your bond portfolio has no place to go but down. Is that a wise investment?

Maybe you're better off leaving your money in cash, as Mohamed El-Erian, chief economic adviser at Allianz and Bill Gross's former boss, says he has done recently. It won't earn anything at all, but at least you won't lose anything.

Then there are long-term bank CDs, when you can earn 2% or so if you're willing to leave your money there for five years or more. Yes, the experts will tell us that beats the level of inflation, so you should be happy with that. But is that what you really want? And will 2% get you where you need to get in retirement?

Sad to say, but this is where the Fed's accommodative monetary policies and quantitative-easing programs that have gone on too long have brought us. You can either invest in an over-priced stock market or an over-priced bond market. It's your choice: In which market do you think you’ll have a greater chance of losing less money?

While not exactly the moral dilemma of Sophie's Choice, perhaps, it's a dilemma all the same, and a serious problem for millions of people.

In fact, there are two retirement crises going on right now. The most serious, and the one that gets most of the attention is that people are not saving enough, usually because they can't. They barely have enough money to pay for today's – and yesterday's – expenses to worry about tomorrow.

But for those who are able to save something in their IRAs or other retirement plan, how will they make enough money on their investments to live off of when they stop working?

Since it seems foolish to put 40% – or anywhere close to that figure – of your money in bonds or CDs, what do you do with that part of your portfolio that shouldn't be in equities?

I have a couple of ideas.

1. Pay off your mortgage

According to an oft-quoted 2012 study sponsored by AARP, more and more older Americans are heading into retirement with a mortgage, or are already there. More than half of those 55-64 have a mortgage, and they still owe about $100,000 on it. You don't want to carry a mortgage into retirement.

You're a lot better off investing in yourself rather than the bond market. It's a 100% guaranteed risk-free investment, and the amount of money you'll save will more than compensate for the measly amount of money you might have earned in the bond market. You'll get a much bigger return on your money.

2. Buy deferred immediate annuities

I've never been a big fan of annuities, largely because they're so damn complicated, but I've been taking a much more serious look at them recently, particularly this variety.

You make a lump-sum payment now, then in 15 years or so the annuity

– Which will have appreciated in value over that time – starts paying out a guaranteed income stream for the rest of your life. If you live a long time, it will be a great investment.

There are some relatively simple ones available. Maybe you won't make a fortune, but at least your money is protected and you'll get lots of sleep insurance knowing your money isn't at risk. The insurance company writing the annuity takes the risk, not you. Putting a good-sized portion of your portfolio – 40% sounds like a nice round number – seems like a good idea.

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George Yacik

INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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