EPF: Lump-sum or partial withdrawals at 55?

EPF: Lump-sum or partial withdrawals at 55?
Written by Celine Tan of theedgemalaysia.com
Wednesday, 31 August 2011 00:12
KUALA LUMPUR: Upon reaching 55, most people prefer to withdraw all their savings in the Employees Provident Fund (EPF) but more and more people are opting for flexible withdrawals (partial or monthly payments).

According to the EPF, last year, 235,931 employees made withdrawals at age 55 and 70% of the withdrawals were full withdrawals. The number of flexible withdrawals increased by 41.67% to 82,690, compared with 2009.

Choosing between withdrawing a lump sum and making a partial withdrawal depends on many factors. Financial planners say you can ask five questions when crunching the numbers for your retirement plan, not at 55.

1) What is your behaviour towards money?


Your EPF savings can be the single largest disbursement of money you will see in your lifetime. “It is something that most individuals look forward to throughout their working life. It gives them a sense of fulfilment when they receive it since they believe that it is then possible to achieve their life goals,” says K Gunasegaran, founder and licensed financial planner of Wealth Street Sdn Bhd.


If you are quick to spend money without a plan, think twice before withdrawing the whole. “Those who are not used to having large sums of money tend to get emotionally charged. It can lead to splurges on big-ticket items such as luxury cars. While the money is rightfully yours and it is not entirely wrong to benefit from your retirement savings, be aware of the consequences. If you know that you are an emotional spender, it is best to drop the idea of a lump-sum withdrawal because you have to make smart choices with the money,” says Gunasegaran.


2) Can you generate higher returns at a higher risk?
The primary concern of retirees is whether their retirement savings can sustain them throughout their golden years and generate sufficient returns to outpace inflation.

Headline inflation, as measured by the Consumer Price Index (CPI), increased to 3.3% on an annual basis in May, according to Bank Negara Malaysia (BNM). From 2005 to 2010, the average inflation rate in the country was 2.77%, reaching a historical high of 8.5% in July 2008 and a record low of –2.4% in July 2009.

For the past 59 years, from 1952 to 2010, the EPF has declared annual dividend rates of between 2.5% and 8.5%. In the past 10 years, the highest dividend payout from the EPF was 6% in 2000 and the lowest dividend payout was 4.25% in 2002. “If you are conservative and expect the EPF to continue providing decent annual dividends, opt for flexible withdrawals,” says Wong Keng Leong, practice manager and licensed financial adviser representative at Standard Financial Planner Sdn Bhd.

Headline inflation, however, is not necessarily a reflection of the rise in a household’s real cost of living. This means that the returns on your retirement savings should far exceed the reported CPI figures.


“Also, the EPF promises a minimum dividend of 2.5% per annum. If you think that you or your financial adviser or fund manager can surpass the average returns made by the EPF, consider a lump-sump withdrawal to boost your retirement nest egg,” says Gunasegaran.

When doing so, observe the associated costs such as sales charges or management fees levied by the financial professionals and financial institutions. If you decide to retain your retirement savings with the EPF, there will be a small charge that differs from year to year.


3) Would you still be paying debts at age 55?


If you will still be servicing high-interest debts at age 55, consider using your EPF savings to pare down or settle the loans. This is especially so if the interest levied is higher than the returns generated by your savings.

“High-interest debt includes credit cards [interest rate ranges from 13.5% to 17.5% a year] and personal loans [interest rate ranges from 8% to 12%]. Holding any of these debts negates any investment gains unless you are able to get superior returns on your investment over the years. Withdrawing your retirement savings, be it in a lump sum or partially, to settle your high-interest debt is a smart option but ensure that there is still some money left for your retirement, says Wong.

There is no fixed rule on how much debt you should settle. “How much you should pay off depends on the quantum of your savings. Also, it is good to check whether your debt can be restructured to reduce the interest you have to pay. If so, evaluate the financial benefit of settling this debt with a lump sum withdrawal of your EPF savings,” says Gunasegaran.


4) Do you want to control your retirement funds?

Contributors have little control over how their savings are managed and invested by the EPF, which has sole discretion on how to invest the money that they receive and the dividend (over the minimum amount guaranteed) to declare.


“If you want to take full charge of your retirement savings [either on your own or with professional help], you can do so at 55. When you take a lump-sum payment, you are able to invest in investments that may not be available to you if you were to retain your savings in the EPF [withdrawals can be made to EPF-approved local equity funds],” says Wong, who observes that most of his retired clients withdrew all their EPF monies at 55 as they were comfortable with managing their own money.


A key benefit of withdrawing your retirement savings in a lump sum is that it allows you to expose your loved ones to managing money with a long-term perspective. “At the point of death, most of us will not want to leave a large sum of money to loved ones who cannot manage it. In all likelihood, the money will be spent sooner than planned. Withdrawing your retirement savings in a lump sum at the point of retirement allows you to slowly educate your young-adult children on how to manage a big sum of money. Let them know where you keep your savings and what you are doing with it. This is an alternative to receiving a lump sum from the EPF when you are no longer around,” says Gunasegaran.


5) Do you have a plan to access your money?


If you are 55, under the EPF’s monthly payment withdrawal scheme, the board will transfer the total amount into a special account and put monthly payments into your bank account.

If you opt for a lump-sum withdrawal, how will you draw down your money to fund your lifestyle? There are two options to evaluate. Wong suggests that you should plan a draw-down strategy that includes either a quarterly or half-yearly redemption. “Note that some instruments allow you to make periodical withdrawals but may impose charges.”

On the other hand, Gunasegaran thinks that it is more advisable for retirees to put their retirement savings into annuity-like insurance plans, under which they will receive annual payments after a certain number of years.

http://www.theedgemalaysia.com/personal-finance/192209-epf-lump-sum-or-partial-withdrawals-at-55-.html

Taking a loan in your golden years

Taking a loan in your golden years
Written by Celine Tan of theedgemalaysia.com
Monday, 31 October 2011 07:48


Banks might be reluctant to lend to retirees but there are ways to increase your chances of getting a loan


For retirees, the best practice is to live on cash. Says Ng Chee Yong, a licensed financial planner at the financial care centre of wealth solutions provider CWA, “Whenever possible, pay with cash. A loan is taken to finance items that you cannot afford, a situation that retirees without a steady income should avoid.”

Nevertheless, unforeseen events or emergencies may compel you to borrow. For instance, an offspring may face financial difficulties and most parents would find it difficult to deny assistance. Or you might want to start a business or invest in properties. “After retiring at 55, many retirees start small businesses.

It is not surprising to find them applying for business or personal loans,” says Thoo Mee Ling, head of secured lending at OCBC Bank (M) Bhd. “Apart from that, those who are active in the property market will continue to buy and sell. They need to turn to banks for home loans.”

Louis Loh, business development manager at VKA Wealth Planners Sdn Bhd, says most of his retired clients take loans to buy new cars or refinance their homes.

“Some retirees may prefer to get a loan when purchasing big-ticket items although they can afford them. They think that they will be audited by the Inland Revenue Board if the items are paid in cash.”


Generally, financial institutions deny loans to those who are not earning an income. However, you can obtain a loan in certain situations, especially if you have planned for it. Here are six tips to maximise your chances of getting a loan in your golden years.

1 Take the loan before you turn 60


Each financial institution implements and adheres to a set of lending guidelines. “The guidelines are essential for the bank to manage its risk and returns. These guidelines include risk criteria set out by regulatory bodies such as Bank Negara Malaysia. Age [of borrowers] is a variable that a bank controls through its lending guidelines,” says Thoo. “If you think that you might want to get a loan during retirement, it is best to take the loan before you turn 60. The most ideal time is between 50 and 55,” says Loh.

2 Cut margin of finance and/or loan tenure


“Nowadays, some financial institutions prefer to give out lower margins of finance because they want to decrease their non-performing loans. Generally, banks will give loans to retirees who ask for a 50% margin of finance,” says Loh.

“If you are 56 and want to get a 15-year loan, the financial institutions may be concerned. But, if you want to get an eight- or 10-year loan, they are more comfortable with it. In addition, this lowers your borrowing cost,” says Ng.


Loh observes that it is far easier for retirees to obtain car loans, which have short tenures of two to five years, rather than home loans. “Note that most financial institutions are reluctant to give out loans to retirees over 60 even if they have repayment capacity or are willing to cut the loan tenure.”

3 Document your sources of income


One of the most important aspects of getting your loan approved is your repayment capacity. “Your income [finances] must be able to prove that you can,” says Loh.

“Make your income ‘official’. For instance, if you sell cakes or babysit, legalise your business by setting up a sole proprietorship. This will need few months of planning,” suggests Ng.

If you are going to use rental income to support your loan application, provide proper documentation. “Get your tenancy agreement stamped and keep all records of payments. Get the tenant to bank the rent into your account,” says Ng. Besides receiving a continuous stream of income from these assets, Loh adds that your chances of obtaining a loan will improve if your existing properties are fully paid up.


But, bear in mind that financial institutions only consider income that is consistent and secured. “Lenders generally do not favour lending to insurance agents, unit trust agents, direct-selling marketers, remisiers or brokers. This is because their incomes are based on renewal of sales and the lenders assume that such income will not last for a long time, unless they have a group of people to continue running their business,” observes Loh.

Therefore, it is essential to build up a sizeable passive income stream prior to your retirement. Passive income can be generated from rental, dividends from shares, bonds and unit trusts, or commissions. “[Passive income] complements our pension fund and supports our repayment capacity,” says Thoo.


4 Get a guarantor or joint borrower

Generally, financial institutions prefer to give loans to retirees who have a guarantor or joint borrower. “By guaranteeing the loan, the guarantor or joint borrower, usually a family member, is legally liable for the repayments as well,” says Thoo.


Loh observes that financial institutions prefer a joint borrower to a guarantor. “This is because a joint borrower is seen as having more commitment than a guarantor. However, where the joint borrower has a high debt-asset ratio, the financial institution may consider him as a guarantor instead.”

If you ask an income-earning family member to support your loan application, document the agreement. “You need to put everything in black and white. Inform those involved and communicate your plans,” says Ng.

If you are taking a mortgage loan, determine if the joint borrower will co-own your property. If not, this arrangement is tricky and can affect your estate. Also, note that the joint borrower or guarantor will have to continue servicing the loan should you pass away. “If the loan is not insured, your child will be burdened if you pass away while servicing the loan. The debt will not stop when you die, but will pass on to your legal beneficiaries,” says Loh.

5 Pledge collaterals



Collateral such as fixed deposits, unit trusts and shares can be pledged when applying for a loan. “As a rule of thumb, fixed deposits are favoured because they are liquid assets. Most banks, if not all, will offer a 100% loan if it is collateralised by a fixed deposit. Unit trusts and shares can be offered as well, although the margin of finance varies, depending on the bank’s risk appetite,” says Thoo.


If you pledge your fixed deposit, you cannot use the funds in the account throughout the tenure of the loan, says Loh. “Usually, banks will ask for a RM20,000 fixed deposit or a sum equivalent to 10% of the property’s value. This is the minimum amount needed to auction off the property if the borrower defaults.”



Financial institutions typically do not ask for property as collateral for a personal loan. “They are not in the business of liquidating such assets,” says Ng. The bank will incur a cost in holding a property auction and the price of the property will usually be lower than the market rate, explains Loh.

6 Stick to the same bank


Where possible, build a relationship with your banker. “If you have a good relationship with your banker, it might be easier for you to get a loan. For instance, if you always get your loans from the same bank, it might be more lenient and go the extra mile for you,” observes Ng.

http://www.theedgemalaysia.com/personal-finance/195379-taking-a-loan-in-your-golden-years.html

Mixed views on private retirement scheme in Malaysia

Wednesday December 7, 2011

By TEE LIN SAY 

linsay@thestar.com.my

PETALING JAYA: Fund managers are mixed on the feasibility of setting up a private retirement scheme (PRS), as they need to know how it is governed and how different it is from a typical unit trust.

On Monday, the Securities Commission (SC) finalised the eligibility requirements for PRS providers. The recent enactment of the Capital Markets and Services Amendment Act 2011 provides the regulatory framework for a PRS industry, including empowering the SC to approve the providers.

MCIS Zurich Insurance Bhd fixed income head Michael Chang said that as the PRS initiative was relatively new and complemented existing social security funds, there were a number of questions that would be raised by potential investors.

“If it is not mandatory, how would these funds have decent investable sizes? How would one PRS be different from another? Size of an investment fund matters as you are able to reduce the investment costs for the benefit of investors,” Chang said.

He added that PRS providers would have to offer more compelling retirement returns than the mandatory ones. Also, it has to be attractive enough, more so than an insurance fund.

“An insurance fund does both: provides protection and savings. Retirement funds then have to ensure the returns generated at retirement are sufficiently available to the retiree for a comfortable living,” he said.

Chang pointed out that most investors these days could already asset-allocate on their own via unit trust funds or private banking expertise.

“So the selling point has to be more convincing. I mean we are relying on the asset allocation of PRS providers, hoping what they do gives you a reasonable return upon retirement.” he said.

Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong feels that the move was healthy and in line with international practices.

“As people become more financially sophisticated, there is no reason to limit what they want to invest in. It is always good to have different providers.

“Instead of letting someone dictate how much dividends you get per annum, now you can decide on your own,” said Yong.

Yong feels that there will be many that would want to provide these services.

According to the SC, a select number of suitably qualified and experienced providers with the required expertise in pension or retail fund management would be approved to offer PRS schemes with an appropriate range of dedicated retirement funds catering to different investment and risk profiles.

Applicants will be assessed on their financial standing and organisational capabilities, including meeting relevant capital requirements, internal controls and risk management practices.

http://biz.thestar.com.my/news/story.asp?file=/2011/12/7/business/10044630&sec=business

More than half (56 per cent) admitted to having no idea what level of income they would need to lead a comfortable retirement.

Money is biggest source of rows for middle aged

Money is the biggest cause of rows for most middle-aged couple, ahead of staying out late and a partner's choice of friends, a survey has suggested.

When couples were asked if they knew what level of income they would need to lead a comfortable retirement, more than half admitted to having no idea Photo: ALAMY

9:54AM GMT 05 Dec 2011

New research found that money is the biggest cause of arguments for 27 per cent of couples over the age of 40.

The figures suggest that the state of their finances is more likely to cause couples to fall out than disagreements over housework, staying out late or their partner's choice of friends.

The study, which looks at how co-habiting couples over the age of 40 are planning for their retirement, also found that nearly one in five (17 per cent) say that they don't feel comfortable talking about finances with their other halves.

Twenty per cent of the 2,000 people surveyed by finance giant Prudential have never had a conversation with their partner about the income they think they will need in retirement.

And while the majority of couples have discussed their pension incomes in the last year, a third (34 per cent) of them only talked about it for half an hour or less.

RELATED ARTICLES

• Private investor: 'Why I am buying gold' 
  30 Nov 2011
• Turn your home into a business 
  29 Nov 2011
• Cyber Monday: shoppers flock online 
  05 Dec 2011

When couples were asked if they knew what level of income they would need to lead a comfortable retirement, more than half (56 per cent) admitted to having no idea.

Vince Smith-Hughes, head of business development at Prudential, said: "There is no hiding from the fact that sometimes our finances are a tough topic to talk about. It is all too tempting to put off conversations about the money we'll need in the future."

http://www.telegraph.co.uk/finance/personalfinance/8935620/Money-is-biggest-source-of-rows-for-middle-aged.html

There are four ways to protect yourself from the current economic turmoil.

Paying for a cult of risk
Anneli Knight
November 23, 2011

Money extremes … governments need to create policies to avert further financial woe. Photo: Reuters

There are four ways to protect yourself from the current economic turmoil.

The former derivatives trader who in 2006 predicted the global credit crisis, Satyajit Das, says the world economy will continue to deteriorate unless international policymakers co-operate. Either way, he says, we're heading for dramatic change and offers a few tips on how to weather the storm.

In his book Extreme Money: The Masters of the Universe and the Cult of Risk, Das has coined the term ''extreme money'' to refer to the ''process of financialisation'' that has underpinned the banking sector and global economics throughout the past 40 years.

''Money was always a medium of exchange, a store of value but, essentially, what happened in the last 40 years is that it changed … and became the driver of economies,'' he says.

Advertisement: Story continues below

Das says this process made borrowing a key driver of growth. ''You end up with this situation of pure speculation as a way of making money - we like to call it investment.''

His book chronicles the recent history of banking and the way it has shifted from a simple era - in which banks existed to borrow and lend sensible amounts, offer convenient and safe payment mechanisms such as credit cards and help manage risk with products such as insurance - up to the current state of chaos.

''Extreme Money spans this period and tries to turn out every little piece, which on its own looks fine, but when you add them all up it's this horrific tale of how we deluded ourselves for over 30 or 40 years.''

Das says governments are in denial about the huge co-operative effort required to avoid turmoil. ''We've been trying to defy financial gravity; the question is: do we come down in a gentle control glide or do we just crash?''

Proactive and aggressive policies taken by global leaders are required to cushion the landing, Das says, acknowledging the inherent challenge in garnering international agreement on policies that will bring pain.

''There's huge denial because if people want to confront this they'll have to unravel a lot of things they've put in place over the last 30 years, which would mean lower living standards, which, in my view, is inevitable anyway.''

Regardless of the approach world leaders take, Das says, individuals can begin to take steps now to cushion their own financial circumstances.

TAKE CHARGE

Taking the time to understand your investments is crucial, Das says. ''You're the only person who can make a decision about what you're comfortable with,'' he says. ''We've just delegated that to other people - funds managers, advisers - and generally, on average, they've not done a great job. There's also a conflict of interest because that person will always think their product is the best, naturally, even if it's not best for you.

''People have just walked away from trying to understand this, which is crazy because it's a very important part of your life. You have to understand this because otherwise you'll pay for this and you'll pay for this with your hard-earned cash.''

REDUCE DEBT

Das forecasts borrowing costs may increase and it will be more difficult to secure a loan as the debt problems in Europe spread to the US and Japan and make it more difficult for Australian banks to lend from overseas. In a time of higher risk, higher cost and less availability of funds, you should reduce your debt, Das says. ''Essentially, reducing your debt means cutting your mortgage, or, if you have a business, reduce the debt as quickly as possible.''

SAVE MORE

''We're entering a period of lower returns, which means we need to save more,'' Das says.

''Individuals are going to need a lot more savings than they imagined because what Australians have relied on are two things: the value of their houses, which is a complete illusion because your house is not an investment, it is where you live. And the other savings are superannuation but the problem is your retirement savings are not earning enough to give you a reasonable lifestyle at retirement. Retirement savings earnings are pretty abysmal and they're not going to go up - if anything they're going to be lower.''

As the global economy changes to a more realistic situation, Das says the Australian government will be forced to pull back funding for services such as education, health and aged care.

''You are going to need more of your personal resources to pay for all these things than you imagined because governments can't afford to pay.''

SEEK CAPITAL SECURITY

With a forecast of low growth and high risk, Das says investors should seek secure investments with a focus on income rather than capital gain.

''You really need to get investments which provide you with income you can live on,'' he says. ''If you have money to invest, make sure the money you have is protected. That will be very important.''

Key points

Satyajit Das recommends four ways to protect yourself:

❏ Take charge of your own finances.

❏ Reduce your debt.

❏ Save more.

❏ Be concerned with capital security and income rather than capital gain.

Satyajit Das's book Extreme Money: The Masters of the Universe and the Cult of Risk is published by Portfolio (Penguin, $32.95).

Read more: http://www.smh.com.au/money/planning/paying-for-a-cult-of-risk-20111122-1nrfd.html#ixzz1eXknG4Ce

Tortoise always wins in super race

Tortoise always wins in super race
Chris Becker
November 23, 2011 - 12:01PM

 

Retirement may come sooner than your super fund's recovery. Photo: ThinkStock

We all bemoan the state of our super when we open our statements each year particularly given the rolling ongoing crises that beset the share market. Yet the common wisdom is to always look to the long term and eschew focusing on the short-term gyrations.

You've probably heard that to fund your retirement, your super fund should return inflation plus three per cent. To achieve this, you've been told to allocate nearly three quarters of your retirement savings into growth assets, mainly shares, or you will miss out on their growth and have your savings eroded by inflation.

The reality is most super funds cannot achieve this performance nor capture the upside potential - "they're dreaming" - as Darryl Kerrigan once put it.

Advertisement: Story continues below

According to SuperRatings, the average return for the 50 largest "balanced" super funds over the last five years is 1 per cent per year. Over a 10-year period it averages 5.1 per cent per year. Across all types of super funds (except self managed), returns have averaged 3.3 per cent per year - or just 0.3 per cent above inflation. Dreaming indeed. The problem is further compounded because the averages hide the inevitable volatility that comes with "investing" in growth assets.

In your writer's previous report, Time to rethink your super,  (also available here as "Tackle Risk for Super Returns"), we looked at a different technique to overcome the dual problem of underperformance and volatility - the barbell portfolio.

First, your super is for saving, not speculating, and should mainly comprise solid investments like bonds, term deposits and annuities. Secondly, you should still have exposure to growth assets, but you must consider the risk before the potential return as the long term implications are devastating to your retirement savings.

The tortoise and the hare

Here's the reason why the downside matters more than the upside. Imagine two portfolios - the tortoise and the hare. The hare is your typical "balanced" fund, with over 70 per cent assets in shares and property, the rest in cash and fixed interest. Over a thirty-year period, the hare will experience some "fast" years, earning well over 10 per cent, and occasionally will fall into a puddle, earning nothing or losing a few per cent.

Not so often, by not looking where he is going, he falls into a deep hole, losing 20-40 per cent of the portfolio. He climbs out and sets off again. The Tortoise takes a different path, avoiding the holes and puddles, plodding along, always earning between 4 and 8 per cent year in, year out. But “on average” the hare should win, right?

The reality is the hare hasn't understood time and opportunity cost. To get back to even after a 20 per cent loss - a common occurrence in the last 4 years - requires a 25 per cent positive return. Even if he has successive 10 per cent returns each year, it will take him 8 years in a row to catch up to the hare earning a positive 6 per cent year in, year out. And that's without falling into any more puddles or holes.

Compare the funds

So let's compare some real world performance. Assume a starting balance of $100,000 in 2001 in a balanced and a barbell portfolio, where the latter has a 90/10 weighting of “investment” and “speculative” assets. The former will comprise a third cash, two thirds bonds, the latter only an Australian share index fund.

The real potential behind the barbell portfolio is twofold. First, it outperforms the balanced fund by 23 per cent, by averaging a little more than the required 6 per cent a year (3 per cent plus inflation). More importantly, it smoothes the returns by limiting the downside volatility, with a maximum drawdown of 2 per cent, compared to almost 13 per cent for the balanced fund (remember this is an average over a 12 month period.

In reality, the typical balance fund dropped over 20 per cent in value during the GFC. Not a good time to retire.)

This absolute return allows peace of mind for retirees and avoids the “hare” problem for accumulators. How to do it

The basic barbell portfolio described above can be easily constructed with the required investment options available within the most popular retail and industry super funds.

Remember the allocation, the vast majority of your fund should be in secure "investment" assets with almost zero potential for drawdown or loss of capital. Most funds have a "cash" option and a "bonds" or "fixed interest" option available. Consider a bias to the latter, e.g up to 60 per cent in bonds, as the top 25 diversified fixed-interest funds have returned at least 5 per cent per annum over the last 10 years. Some funds will even have a "term deposit" option, which could return as much as 6 per cent per annum.

The speculative side of the barbell - no more than 10 per cent - would be best allocated to Australian shares only. I would not consider international shares, due to the structural inability of fund managers to provide even a positive return over a 10-year period. A small amount in property or infrastructure - even up to 5 per cent - could be considered due to the income stream, but remember these assets are extremely risky and illiquid.

Don't forget security - the bar that binds the two together. In a non-DIY fund, the best security asset is life and disability insurance where the costs are usually much cheaper due to the group discounts within the fund.

Conclusion

Relying on market volatility and traditional asset allocation to provide the return in your super has been shown as unreliable even in the biggest bull market in history.

Regardless of market conditions, either blue skies or impending doom, you need constant positive or “absolute” returns to both build and protect your precious retirement savings.

Chris Becker writes as The Prince at MacroBusiness. He is a full-time equities trader as well as a partner in Empire Investing, a private value investing company. The full MacroBusiness "The tortoise route to riches" report is available free at MacroBusiness, as is the "Tackle risk for super returns" report.

Read more: http://www.smh.com.au/business/tortoise-always-wins-in-super-race-20111123-1ntod.html#ixzz1eXhAAUP1

'Scared to Death': Should I Move Into Cash?

by Walter Updegrave
Tuesday, August 9, 2011

Over the years, I've lost huge amounts of my retirement fund. I've been through the savings & loan fiasco, the tech stock bubble, the crash of 2008 and now this market. I can't afford to lose my money again, so I'm considering moving it all to cash. Do you think that's a good move? I'm scared to death. -- Cheryl P., Houston, Tex.

More from CNNMoney.com: • Retiring Soon: How to Ride Out the Market Volatility • Your Money in a AA-Rated U.S.  • What the Debt Downgrade Means for Your Mortgage

I hear you. Looking back over the past twenty-five years you can easily get the impression that all we've done is lurch from one crisis to the next.

Add to that backdrop new worrisome twists like Standard & Poor's debt downgrade of the U.S. government and Fannie and Freddie Mac, the specter of a double-dip recession, the economic woes in Europe and Monday's more than 5% plunge in the Dow, and it's understandable why you'd want to ditch stock and bond funds and huddle in cash.

But that would be a mistake.

Now is not the time to give in to emotions and make rash moves. It's the time to take a few deep breaths and dispassionately set a sensible course for the future.

Let's start with a little perspective. Yes, the fact that U.S. debt no longer carries a top triple-A rating is troubling. But it's not as if S&P told investors something they didn't know before (i.e; that our country's long-term finances are a mess).

As for the economic effect the downgrade might have, that's far from clear. Ultimately, though, bond investors' expectations will determine the yields on Treasury bonds, not the opinion of a bunch of guys in ties over at S&P.

And, so far, investors seem to be rushing into Treasuries not away from them. So I think people may be overreacting to the whole downgrade thing.

That said, whether the sell-off was an overreaction to the downgrade, the growing sense that the economy may be weaker than previously thought or something else, investors have clearly shown they're skittish about stocks.

But this isn't exactly news either. Although we lose sight of it from time to time, the fact is that the stock market is and always has been a very volatile place.

The flip side of that volatility, though, is that stocks have also generated some pretty impressive long-term returns. If you look at the 56 rolling 30-year periods from 1926 through 2010 (1926-1955, 1927-1956, etc. through 1981-2010) the lowest annualized return stocks have delivered over a 30-year span is 8.5%, and the average 30-year annualized return for all those periods is 11.3%. For bonds, the numbers are 1.5% and 5.1%, respectively.

This doesn't mean stocks will generate the same gains over the next 30 years. I wouldn't be surprised to see them come in considerably lower.

But I don't see any reason why, over the long term, one would expect stocks to underperform bonds or cash, especially considering the current low yields on bonds and cash equivalents.

So it seems to me that the challenge for someone investing his nest egg today is still pretty much what it was before all the debt-ceiling-downgrade hoopla: to participate in stocks' long-term growth without getting hammered too badly when stocks suffer their inevitable periodic declines.

There are two ways you can try to do that. One is to attempt to outguess the market — that is, capitalize on stocks when they're doing well and then move out of them into bonds or cash or gold or whatever to avoid downturns.

The other is to invest in a reasonable mix of stocks and bonds and basically stick to it, allowing the bond portion of your portfolio to dampen stocks' swings. The first approach — moving in, out and around various parts of the market — is difficult-to-impossible to pull off consistently.

If you doubt that, just consider recent events. In the weeks leading up to August 2, investors' biggest fear was that Congress and the Obama administration might fail to raise the debt ceiling on time and thus spark a stock-market meltdown.

People were so convinced that this would threaten their portfolios that many considered moving their money into cash to protect against that possibility. When Congress and the White House reached a deal before the Tuesday deadline, the big market swoon everyone feared was averted.

However, two days later, while investors were still feeling good about dodging the debt-limit bullet, the Dow plummeted 510 points on concerns about the European debt crisis and the possibility of the U.S. sliding back into recession.

And then came Monday's wild 635-point Dow free fall in the wake of S&P's downgrades.

My point is that you can never really tell what might initiate a market decline — let alone know when it might occur.

The more sensible way to participate in stocks' long-term growth is to create a mix of stocks and bonds that gives you a shot at solid returns and offers at least some protection.

The longer away you are from retirement and the more your stomach can handle the value of your retirement savings taking the occasional hit, the more you can devote to stocks.

The closer you are to retirement and the more upset you get when your nest egg gets whacked, the more you should tilt toward bonds and cash. If you're on the verge of retirement, that mix might be somewhere around half in stocks and half in bonds.

Taking the asset allocation approach and sticking with it (except for periodic rebalancing) won't immunize you against losses. But it can help you manage the downside risk of stocks without giving up all the upside.

And, more importantly, it gives you a rational way of dealing with the stock market's volatility and keeping downturns to a magnitude you can handle, rather than engaging in a never-ending guessing game.

By trying out different blends and seeing what sort of losses they incurred, you can get a better feel for what stocks-bonds allocation might be right for you.

Remember, though, if you go with too conservative a strategy to guard against market downturns, you limit your upside. So to get a sense of whether the asset allocation you choose will give you a large enough nest egg to support you in retirement, I suggest you also run it through a calculator like Fidelity's Retirement Quick Check or T. Rowe Price's Retirement Income Calculator.

I don't want to downplay the seriousness of the situation facing investors today. We could very well see lots more turmoil in the financial markets and further declines in stock prices.

But the fact is that there will always be something going on that investors will feel compelled to react to, whether it's the threat of a recession triggering a market meltdown or, in better times, rosy reports of economic growth and corporate profits suggesting the markets will soar.

But if you invest on the basis of hunches and speculation rather than setting a coherent long-term strategy and sticking to it, you'll put yourself at risk of selling after prices have already fallen and buying back in when prices are already inflated.

In the end, that will make it tougher for you to earn the returns you'll need to build a decent nest egg and harder for you to maintain your emotional equilibrium in tumultuous times like these.