Cushion bumps with diversity. RETIREMENT PLANNING

OCT. 19 happened more than seven months ago. But it's already become one of those searing memories about which people ask each other: ``Where were you when you first heard about it?'' Today, many people who were in the stock market then are still trying to figure out what to do.

This is especially true of people who are trying to plan for retirement. Even if the stock market's plunge cost them only one year's gains, and even if they've cushioned the blow with mutual funds, that day graphically illustrated how one event can shake the foundation of years of retirement planning.

Add to that the continuing confusion over the effect of tax reform and speculation about a return of higher inflation, and it's easy to see why some are starting to think of ``retirement planning'' as an almost impossible task.

But retirement planning must proceed anyway, despite uncertainties and surprises.

The keys to making those plans pay off, retirement advisers and financial planners say, are, diversification, flexibility, and the willingness to make frequent adjustments. This year, a portfolio dominated by bonds, money market instruments, and certificates of deposit may be the most prudent answer; next year, real estate programs could work better; another year, you might go back to stocks.

Or, as you probably should do, you'll elect to have several of these types in a retirement portfolio, but vary the proportions as your needs and economic circumstances change.

``October opened a lot of eyes,'' says Jeff Greenberg, director of retirement services at Oppenheimer & Co. ``People are now reviewing their objectives and retirement portfolios.''

Often, reviews have led these people to diversify their portfolios away from spectacular gains to less spectacular but more dependable returns.

``Retirement planning should be seen as a very long-term thing,'' Mr. Greenberg says. ``And you should invest accordingly.''

``I think there's been a reevaluation due to the perception of increased risk,'' says John Markese, director of research at the American Association of Individual Investors (AAII) in Chicago. ``And that's healthy. People were lulled into thinking that stocks weren't as risky as they turned out to be.''

Many people, of course, weren't hurt much by the stock market's plunge. ``People who bought when the Dow was at 500 still have most of their gains,'' says Kenn Tacchino, an assistant professor at the American College in Bryn Mawr, Pa.

While Oct. 19 has shifted some retirement strategies, others have kept their money where it was. Most workers with 401(k) employer-sponsored retirement savings plans appear not to have shifted retirement money out of equities into fixed-income investment, says Barry Cosloy, a partner at Coopers & Lybrand, who surveyed some of the accounting firm's clients.

Some workers, however, have decided to put more of their ``new'' money - earned and deposited since Oct. 19 - into annuities or money market vehicles, Mr. Cosloy says.

On the other hand, some people feel the stock market - especially if it can be used to save taxes - still has advantages. Tax reform eliminated the lower tax rate for long-term capital gains, but the capital-gains tax can still be postponed if the trading is done within an individual retirement account.

``One thing I've seen is that IRA rollovers [transfers of money from pension plans into IRAs] tend to be much more equity-oriented than before,'' says Heidi Steiger, managing director of individual asset management at Neuberger & Berman, a money management firm in New York.

Of perhaps greater concern than the stock market right now, financial advisers say, is inflation. Over time, even a relatively low 4 percent inflation rate can force you to save more now to ensure there will be enough assets at retirement. Inflation, of course, also erodes the purchasing power of the money saved when you do retire.

``Over the long term, we will always have scarce resources and high demand, and that means inflation,'' Mr. Markese says. ``Every retiree has to be aware of the potential of inflation.''

``Inflation doesn't matter to me,'' asserts Steven B. Enright, a financial planner with Seidman Financial Services in New York. ``If you do the right planning, it's not going to matter.''

In talking over finances with his clients, Mr. Enright says, he asks them about a number of issues, including rates of return, taxes, survivor benefits, expected living expenses, and inflation.

Remember, too, that even a low inflation rate reported by the government may not be the inflation rate you experience. ``Inflationary price increase in the services retired people need have been more than the rate for goods,'' Mr. Tacchino at the American College notes.

``The thing that always comes up most often as a concern is inflation,'' Enright says. ``So we try to set up a portfolio that will hedge against inflation.'' That, he says, means concentrating on the ``real rate of return'' after inflation. A 1 percent real rate of return after taxes and a 4 percent inflation rate means finding investments that pay at least 6 percent.

The lead item in such an inflation-hedging portfolio, then, is money: money market funds, certificates of deposit, Treasuries, and commercial paper.

Most clients, however, want to do more than beat inflation by 1 percent, Enright notes. This helps explain why the big topic among financial planners lately has been ``asset allocation.'' That used to be called ``diversification,'' but it means pretty much the same thing: Don't put all your eggs in one basket.

If there is a difference between the terms, it is in timing. Asset allocation seems to mean diversification of money among assets, while taking the business cycle into account.

Many people concerned about inflation often turn their attention to real estate, which most planners agree isn't a bad place to turn.

For many people, the most important real estate investment is their home. In addition to building up a fund for retirement income, they also try to have their mortgage paid off by the time they retire, so they won't have house payments or rent to deal with.

A second home, or vacation home, can also be a good retirement investment. It can become the principal retirement home, or it can provide income through rentals or a lump-sum payment when it is sold.

``I prefer to see my clients involved in real estate on the personal side,'' with their own property, says Lynn Greene, a financial planner in Durham, N.C.

Beyond the first or second home, investment in real estate should be income-oriented, or in a widely diversified program. Two large mutual fund companies, Vanguard in Philadelphia and T.Rowe Price in Baltimore, have real estate mutual funds that have received good notices from financial planners.

``These are a good way to get into real estate,'' Markese at AAII says. ``They offer broad diversification.''