"Silver Threads, Golden Rules"

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It's a time of life that should be as relaxed and as worry-free as possible. For the financially well-prepared, retirement can mean the pursuit of hobbies and leisurely outings and the odd trip abroad. For those who fail to organize their affairs properly, however, a worryingly different reality looms — one of tightened belts, limited savings and the scramble to find other sources of income.

In the face of already creaking budgets and alarming demographic trends, European governments are desperately trying to scale back their pension obligations. As the state casts about for ways to alter the retirement provision picture, the onus will increasingly be on you, the individual, to boost the income you will have in your post-working life. Some Europeans have already started: over the past few years tens of thousands of E.U. citizens have taken money out of low-yielding cash and bond instruments and put it into higher-return asset classes such as equities. But it is by no means a simple task: building a decent retirement pot takes time and planning, and while portfolios can always be fine-tuned to suit individual needs, a few golden maxims apply:

•   Start as early as possible. To young workers, retirement can seem a long way off. But the longer you wait, the harder it is to catch up — and the more you will have to set aside later. It's a case of "As soon as you can, as much as you can, when you can," says Martin Campbell, research and development manager at Virgin Direct, a U.K. investment management firm. "If you can get people to start early enough, a decent retirement becomes quite affordable." Even for those very conservative savers who want to stick to plain vanilla savings accounts, a few years can make a difference — to accumulate $500,000, a saver must put aside about $560 a month at 5% compound interest over 40 years. To get the same result in 30 years, the monthly put-aside jumps to about $625.

•   Consider your age. As a rule of thumb, the younger you are, the longer your investment time horizon is and therefore the riskier your portfolio can be. Make use of assets like corporate stocks, which although considered high-risk in the short run, historically have been stellar performers over the long term. "Our general recommendation is for 100% equities minus your age," says Rolf Drees, an analyst and spokesman at Union Investment, an asset manager in Frankfurt. "If you're 30, then you have 70% in equities." As retirement approaches, investors should rebalance their portfolios to increase exposure to less risky assets like cash and bonds, which yield an income but give lower returns. Although such guidelines are useful, investors should also adjust their portfolios according to their own risk tolerance. "If you get headaches when the stock market is down 10%," says Drees, "then 70% equities might be too much."

•   Diversify your investments. An overall mix of assets is more likely to protect you from the vagaries of the marketplace — maximizing returns while minimizing risk. Advisers recommend a cash cushion — so that if emergencies come up, you will not be forced to sell shares — and at least a small exposure to bonds. They also suggest that investors have a broad share mix: rather than having all your equity holdings in technology shares, for example — which might have given you a few sleepless nights of late — you should also have them in other sectors like banking or utilities, and in regions like the U.S. or the Far East.

•    Exploit tax schemes that encourage saving. Many pension and investment products have tax-free elements that can make a big difference to the final pot, and it's worth making use of these wherever they are in line with your investment goals. One of the easiest places to do this can be at work: where contributions to occupational pension schemes are tax-free, it's a good idea to opt for the maximum level. Keep an eye out for products which you can buy into with tax-deductible contributions and — especially worthwhile in a roaring stock market — exempt you from paying tax on any gains made on the shares you hold. But don't become obsessed with beating the tax man. "The most important thing is that the type of investment is suitable," says Justin Modray, an investment adviser at U.K. house Chase de Vere. "We don't recommend something simply because it is tax-beneficial."

•   Develop good habits. Simple strategies like dollar cost-averaging — in which you set aside the same sum every month and invest it, come what may — not only allow investors to buy fewer shares when prices are high and more when they fall, they also help investors build a culture of saving into their everyday budget. You may occasionally need to sell shares in companies whose character has changed markedly over time and which no longer suit your investment goals. In general, though, aside from rebalancing your portfolio as you move toward retirement, try not to tinker with it. You are unlikely to "time" the market better than the professionals, but increased trading will mean increased fees, which will eat into your returns. You will need that money for other things.