It's not Social Security, but Medicare prescription drug program that's on shaky ground

Q. I am conflicted by what I've been reading about Social Security in your columns. You recommend delaying taking Social Security benefits until full retirement (66 for me), if we can afford it, because the payment is much higher and we will realize more money in the long run.

But, you paint a pretty bleak picture about Social Security's long-term solvency and the real possibility of significant benefit cuts. That makes me think I better start taking Social Security as soon as I can in case that worst-case scenario plays out. What is a 60-year-old boomer to do?

Carrollton, Texas

A. The squeeze that is coming probably won't be a direct hit on Social Security benefits. There are two reasons for this, financial and political. The financial reason is that our government has accumulated Social Security trust fund assets - a horde of Treasury obligations - from all the extra employment taxes we've been paying since the last big Social Security reform in the '80s. Those "assets" are on the official books. They can, and will, be redeemed by Social Security in order to make the necessary payments to retirees.

Faced with billions in bond redemptions in addition to perpetual government deficits from other sources, the Treasury will have to borrow real money rather than simply make bookkeeping entries. Worse, it will have to borrow from an increasingly skeptical world (read: China, India, Japan, and Saudi Arabia). It is increasingly clear that our dollars are less welcome now than previously.

Retirees will get their promised Social Security benefits because it is a political necessity, whatever the consequences in the financial markets.

I don't think we can be as confident about Medicare. The unfunded liabilities of Medicare Part D, the prescription drug program, are nearly as large as the unfunded liabilities of Social Security. And that's just a small part of the program. The future costs of Medicare are massively greater than those of Social Security.

Q. We invest in American mutual funds and Fidelity mutual funds. Considering the upheavals that the markets are experiencing, we are keeping our heads above water with the exception of one fund. Fidelity Real Estate Investment was a shining star, but now it is crashing. I want to move to another fund, but my wife says to hang on. Your opinion, please.

R.M., New Braunfels, Texas

A. The reason we diversify our assets is that everything doesn't go up, or down, at the same time. That's why we should own cash, domestic bonds, domestic stocks, international stocks, international bonds, and real estate investment trusts. Those are all recognized asset classes. Their proportions can be mixed, so you can get a modest return with very little risk or a higher return with substantial risk.

That's what investing is about. Unless you have reason to believe that you really shouldn't have real estate in your portfolio, a down year is no reason to sell. Indeed, if you want to keep your portfolio balanced, it is often a reason to buy more. If the fund's performance trails its competitive peers, however, you should think about a replacement fund.

Q. If you were four years from retirement, where would you allocate your investments? We have about $270,000 saved in an IRA. Would you buy any gold?

N.B., by e-mail

A. I wouldn't buy gold except as insurance against chaos. As long as we continue to have baby showers and PTA meetings in America, we need to focus our investments on earning assets - stocks, bonds, cash, and real estate.

One simple portfolio is what I call the Margarita Portfolio, a mixture of one-third domestic stocks, one-third international stocks, and one-third Treasury Inflation-Protected Securities. It can be done very inexpensively with low-cost index funds or exchange-traded funds. This portfolio gives you diversification. It also gives you some protection against inflation and/or a falling dollar with the TIPS and international equities.

Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com