NEW YORK (MONEY Magazine) -
You've probably given a lot of thought to what your dream retirement will look like. But here's what you really need to think about: How are you going to pay for it?
Time for some quick math. For starters, let's figure you'll need annual income for basic living expenses of $45,000 or so on top of a combined Social Security and pension benefit of $25,000. And let's plug in another $5,000 a year for the rewards you so richly deserve after a long career -- you know, Europe one year, a killer home theater system the next. And oh, there's that 1965 Corvette Sting Ray you've coveted since you were a teenager.
Add it all up and you need, gulp, about $1.2 million. Before you reach for the anti-anxiety pills, take a deep breath. Truth is, even as corporate and government largesse decline, you've got more tools at your disposal than ever to pull it off.
This story lays out a three-part strategy for getting there: You're going to invest differently (read: more aggressively); you're going to tap other assets, including that incredibly valuable one called your brain; and you're going to stay flexible -- cutting back when times (read: the markets) are tough, spending a bit more when they're flush -- just as you have all your adult life.
No false promises here: To live the dream retirement, you need to get real.
Harness the power of stocks
Your first step in turning your retirement vision into reality is to invest more aggressively. The accepted wisdom of subtracting your age from 100 and investing that percentage of your portfolio in stocks may have cut it for the "Leave It to Beaver" crowd. But in a "Desperate Housewives" world -- where you could easily spend 30 years or more in retirement -- you need the growth power of stocks to bulk up your savings and make sure your money lasts a lifetime.
Many investment firms have yet to factor this new reality into their investing strategies, but some are beginning to do so. In the retirement portfolios it recommends for investors in their forties, T. Rowe Price now devotes more than 80 percent of assets to stocks. And it stashes 55 percent of assets in stocks in its funds designed for people in their sixties who are retiring today.
Relying that much on stocks may seem risky. But it's actually more prudent than a timid approach. If the market turns in just average performance over the long sweep of a career and retirement combined, a more aggressive approach not only delivers a larger retirement stash by the time you're ready to retire but also lets you squeeze a couple of extra years of income from your portfolio. The results will be even better for the aggressive portfolio if the market performs anything like it has over the past 20 years.
Ah, but what if the markets perform poorly? Well, the more aggressive strategy comes out ahead there too. True, it falls behind slightly during the working years. But once withdrawals begin, stocks' superior growth potential eventually wins out, with the result that the aggressive portfolio lasts five more years than its conservative counterpart.
The reason is that over the long haul, stocks provide more inflation protection than bonds, which increases the longevity of your savings and helps you maintain your standard of living. Of course, you don't want to overdo it.
"If you invest too aggressively, the losses you suffer along the way could be much larger," says Adam Apt, vice president at LTSave, a company that provides advice and planning services to people in 401(k) plans. Bouncing back from big setbacks can be difficult, particularly later in your career.
You also want to be sure that you ratchet down your stock exposure as you age. For specifics on how to set an appropriate investment strategy at each stage of retirement planning, as well as specific fund recommendations to help you carry out your plan, click here to read "A plan for every stage."
Tap other assets
Chances are, though, smarter investing alone won't cover the full tab. You're going to have to turn to other assets.
One of the biggest is your earning power. Whether for enjoyment or for the cash, most people say they plan to work in some capacity after they retire. Those earnings, whether from a new retirement career, part-time work or even a new business, can add up to a sizable asset.
Let's say, for example, a married couple both retire from their career jobs at 62 but work part time over the next 10 years, earning $25,000 a year each. That annual income would be the equivalent of having an extra $300,000 or more tucked away in savings at retirement. (Of course, working may complicate the issue of when to take Social Security.)
Taking a job after retirement has other advantages too. With a regular paycheck, you don't have to draw as much from your investments for living expenses, which gives your savings a chance to grow and lowers the risk of your portfolio running dry. You may also be able to get employer-paid medical insurance for yourself and perhaps your spouse -- an attractive perk, especially if you're retiring early and must wait several years for Medicare to kick in.
Another major asset that can greatly improve your retirement prospects is your home. With house prices up more than 50 percent over the past five years alone, you may be sitting on a home-equity cushion worth more than $100,000.
Your home probably isn't the first asset you'll want to tap, but it's good to know that reserve is there, and that you can get to it in a variety of ways: Trading down to less expensive digs, borrowing with a home-equity line of credit or taking out a reverse mortgage that will let you stay in your home even as you collect monthly payments for life.
Adopt a flexible spending plan
After you've gotten the most out of the assets you own, you must turn your attention to the other key tool at your disposal: managing your spending. Once you begin tapping your portfolio at retirement, keeping a flexible attitude about spending is the single most effective thing you can do to stay on track toward your retirement dream.
For example, financial advisers recommend that when you retire you limit your initial withdrawal to 4 percent of your portfolio's value, then increase that dollar amount annually for inflation so you don't run out of money. That 4 percent isn't a guess; in simulations that put portfolios through thousands of different market scenarios, 4 percent is the amount that provides reasonable assurance your savings will last at least 30 years.
But this sort of analysis doesn't account for the fact that in real life you're not locked into a fixed withdrawal rate. You can make adjustments.
And, indeed, assuming you're amenable to some fine-tuning -- spending more when your portfolio has had a few good years and reducing your spending by 5 to 10 percent when your investments perform poorly -- you may be able to increase your withdrawal rate to 4.5 percent or even 5 percent without significantly raising the risk of running out of money.
"If you're willing to make little adjustments along the way, you find that the numbers become a lot friendlier," says Bob Clyatt, author of "Work Less, Live More: The New Way to Retire Early."
Like the rest of life, retirement doesn't come with guarantees. But if you approach your planning with the determination to save, the discipline to stick to a sound investment strategy and the resolve to remain flexible, you'll have given yourself a great shot at living your dream retirement.
And if things really work out, you can splurge on a GPS navigation system for that 'Vette.
Click here to see a plan for every stage of your career.
For more on MONEY Magazine's special report, The Dream Retirement, click here.