Dear Carrie: This market has taken a huge bite out of my wife's and my retirement holdings. Fortunately, we moved our funds last October into government bond funds, but even these have not held up well. Since we are both retired, in our late 60s, we wonder what we should do next. Generally, for those of us who are retired, with retirement holdings that this economy hit hard, where should we go from here to protect our finances? -- A Reader

Dear Reader: It certainly sounds like the move you made last summer was extremely fortunate. Even though the short-term result of investing in government bonds may not have been as secure as you anticipated, you're probably in a lot better shape than folks who remained heavily invested in stocks. So that was mostly a good thing-- you just got caught in unusual circumstances.

The unfortunate part is that most government bonds owned debt in Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) and have done poorly as a result of the current mortgage market. The good news is that the actions the government initiated in September 2008 to support these companies were designed to help turn this around. But that's history. Now it's time to look ahead.

Three steps

As you probably know, one common way to protect your money is to put it in FDIC-insured investments like CDs or government-backed securities like Treasuries. However, these investments have the drawback of currently offering extremely low returns. And considering that you may have another 20 years or more ahead of you, depending on your personal situation and tolerance for risk, you might want to consider balancing safety with growth. So here's what I suggest:

1. To make sure you always have cash on hand, I believe it's important to keep enough to cover one year's expenses in a money market account or short-term CDs. This way you will be less likely to have to sell longer-term investments at the wrong time to handle a current need.

2. Next, consider putting two to three years' worth of expenses in conservative, short-term bonds. Again, you're not risking money that you may need in the near future.

3. Finally, consider allocating the rest of your portfolio to allow for some growth. For example, you might consider putting 1/3 in stocks and the remainder in bonds.

Choosing bonds

As you do this, of course you're faced with several choices. You've been disappointed in government bonds because of poor performance. For something relatively safe, you might consider Treasuries, but as I mentioned earlier, returns are currently very low. An alternative might be municipal bonds that offer higher return potential plus tax advantages. Even though we can never be sure that history will repeat itself, AAA-rated munis have a good track record, and the rating agencies consider them to be among the strongest as well.

Investment-grade corporate bonds might also be a good choice to consider right now because of higher return potential. But as with any investment, diversification is the key to help manage risk. This might be an excellent time to consult with a financial advisor about constructing a broadly diversified bond portfolio.

What to expect from stocks

While stocks are still scary for many people, I do believe that in the long run and with the right risk tolerance, they continue to make sense. Chances are we won't see the double-digit returns of recent years, but some experts predict long-term returns (over the next 20 years) on stocks of between 7-8 percent. That's significantly more than the likely return for bonds for the same period.

Here, too, diversification is essential, so make sure that your holdings are spread across large-cap, small-cap and international stocks -- and your portfolio includes a broad range of sectors and industries. This way you could be better positioned when the market turns around.

When it comes right down to it, being too "safe" can actually be risky. I believe that the three steps we outlined above will help you achieve both the cash you need for today and the growth you need for tomorrow. But because you are at such a critical time in your investing life, it could also make a lot of sense to consult with a financial advisor as you work out the details. Thanks for the question, and best of luck!