Published: Friday, 17 Jul 2009 | 2:24 PM ET

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By: Bill Losey
On the Money Contributor

This stock market is nuts! How am I supposed to protect my IRA from losing money when I’ve only got three years until I retire?

Joan, as I mentioned in my last post, a few years before retiring you should begin to accumulate an amount of money that's equivalent to 2-5 years worth of cash withdrawals (based upon your expected income needs). This systematic accumulation of cash is done on purpose so that you have a "safe-money" source to pull from when the balance of your investment portfolio and the stock and bond markets may be declining in value. Some people want one year of cash on hand. Some want two years of cash on hand. Some want more. It all depends on your comfort level.

Each time your portfolio exceeds a pre-established benchmark, you should systematically harvest the excess money above the benchmark, and put it in cash or short-term bonds (money market funds, CDs, and/or US Treasury bills). This is the money you will spend. You build up a cash cushion so when you want to take money out of your IRA, it comes from an asset class (cash) that isn't subject to market fluctuation.

For example, let’s assume you have $250,000 in your IRA account. Maybe you establish $275,000 as your benchmark. Any time the value of your account reaches or exceeds $275,000, you liquidate $25,000 and put the profits in a money market fund. When your portfolio performance is positive, you liquidate (sell high) and build up more cash to spend. When your portfolio performance is flat or negative, you simply take withdrawals from your cash cushion. This protects you from having to liquidate shares of your stocks and bonds when they may be declining in value due to normal market fluctuation or a correction.

Bill’s Bottom-line: This “Safe-Money Benchmark” strategy is best implemented 2-5 years before retirement and needs to be monitored at least annually. Additionally, the strategy is easier to implement in a retirement account such as an IRA because there are no tax ramifications until the money is withdrawn.

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Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert for CNBC's "On the Money". He coaches women and couples nationwide with their retirement planning and investment portfolios. Bill is the author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional and he also publishes Retirement Intelligence, a free weekly award-winning newsletter. He can be reached online at www.MyRetirementSuccess.com.

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