Monday, Oct. 26, 2009

Time To Shift Into High Gear

If you're in your 40s, you've still got time to put together a nest egg — but far from the eternity you've been imagining for the past couple decades. The good news for you is that you still have about 20 years before retiring, and looking at stock market returns since 1926 shows there was not a single rolling 20-year period in that time where the Standard & Poor's 500 (including dividends) lost money. That's true in inflation-adjusted terms as well, although the 1960s and 1970s produced a few squeakers.

Meanwhile, in 43 of the 63 periods (68% of the time) the market had an average annual gain in the double digits, and 16 times (25%) the market rose at a robust average annual rate of no less than 14%. So history is on your side for a little while longer, and your prospects for saving a decent nest egg look even better when you consider that the most impressive 20-year periods sprang from a market bottom like the one this past March.

The bad news for you is that very soon any new money you start investing in stocks will have less than 20 years to grow, increasing the odds that you won't get the results you might expect. So start slowly pulling back your exposure. Up until now you might have had as much as 80% of your money invested in stocks. That's too much. A good rule is to subtract your age from 110 and have that percentage in the stock market. If you're 45 you'd want to have 65% in stocks and 35% bonds and cash.

You need to be smart about preserving capital and lean toward a diverse mix of blue-chip dividend-paying stocks and stock funds and possibly commit to a target-date retirement fund that will automatically adjust your asset mix over the next 20 years, guaranteeing that you ratchet back risk a bit every year and end up in income-producing assets at age 65. You're going to need every penny you can save. Guaranteed retirement security is a thing of the past. Just 21% of today's workers are covered by a traditional pension. That's down from 62% of workers 20 years ago, and the figure dwindles further every year. Here's how to put away more money:


Planning For Retirement: Your 40s

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