The Plan for How You Invest
1. Run the numbers
By 60, say the folks at Fidelity Investments, you should have saved about six times your current income. That's assuming you will grow your portfolio by 5.5 percent annually, retire at 67 and live to 92. It also assumes replacing 85 percent of your preretirement income when you stop working.
If you're off track, adjust one of the factors you can control accordingly, says Beth McHugh, vice president of Fidelity Investments. Could you delay retirement? Live on less? Work part time in retirement? A retirement calculator can help you see if you're on track. (Try AARP's at aarp.org/retirementcalculator.) "The closer you get to retirement, the harder it is to close that gap," notes McHugh.
2. Find balance
At least once a year you should rebalance your holdings so that you have the appropriate amount in stocks, bonds and cash (as well as all of their subcategories) for your age and risk tolerance.
This gets more important as you near retirement; should the market stumble, you have less time to make up what you've lost. That means you not only want no more than 50 to 60 percent of your assets in stock, but you also want no more than 5 to 10 percent of your assets in company stock. The average for people in their 60s is 7.3 percent. Scale back if you've got more than that. Not the rebalancing type? Put your money in a target-date retirement fund, which can automatically transition from stocks to bonds as retirement looms.
3. Break the rule
The financial industry has long rallied around the "4 percent rule," which states that your money should last 30 years as long as you withdraw no more than 4 percent annually. But for people who retired right after the markets crashed in 2008, the rule doesn't seem to be holding up.
One alternative: Convert 20 to 25 percent of your assets into an immediate annuity that will provide a fixed income stream for the rest of your life. "I prefer you do it after age 65, even 70," says planner Losey. "The older you are, the shorter your life expectancy, the higher your payout."
An annuity is essentially insurance, not an investment; it won't rise with inflation, and when you die, the principal's gone. But an immediate income annuity will ensure that you won't outlive your money. "Because today's low interest rates are currently not working in your favor, it makes sense to annuitize in chunks as you age," says Losey. "Then, you invest the remainder of your nest egg to provide the growth you need to keep up with inflation."
Next page: The plan for how you spend. »