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Stage 2: Pre-retirement
A plan for every stage: Strike a balance between risk and caution as you approach retirement.
October 11, 2005: 7:17 AM EDT
By the editors of MONEY Magazine
Pre-retirement suggested asset allocation
Pre-retirement suggested asset allocation
The dream retirement

AND...
MONEY's best places to retire

NEW YORK (MONEY Magazine) - You're almost there, so close you can feel the gold watch in your hand. Don't make any sudden moves with your portfolio, but tweak a little here and there.

Goal: Keep the ball rolling

By the time you hit your late fifties and early sixties, you're likely to have accumulated a sizable stash. Still, your portfolio needs to keep growing before you can be confident of a comfortable retirement. This is also the time to re-assess your situation to see whether you really can afford to retire at the age you've planned or whether you should work a few years longer.

Challenge: Protect your assets

As your portfolio gains mass, it's going to be harder for you to bounce back from market setbacks. A 20 percent shrinkage in your nest egg seven years before your planned retirement, for example, could keep you in the work force an extra three years.

Strategy: Cut back on stocks

At this stage, you have to strike a delicate balance between the need to keep earning solid returns and the imperative to guard against late-inning losses. Shrinking your stock holdings to 66 percent will help mitigate the damage a bear market could cause. (Even so, such a portfolio would have taken an 18 percent hit in 1974.) But this asset mix would still give you an even shot of beating 9 percent over 10 years.

Smart move: Do the catch-up

If you're 50 or older, you can stash an extra $5,000 annually in your 401(k) starting next year and an additional $1,000 in an IRA. Over 12 years an extra $6,000 a year could add $123,000 or so to your retirement savings.

The target date fund option Each of these single funds roughly follows the broad asset mix recommended in the table below. T. Rowe Price Retirement 2015 (Research), Vanguard Target Retirement 2025 (Research) and Fidelity Freedom 2020 (Research).  Top of page

The boomer mix
Build a mix of index funds or actively managed funds from the seven categories below.
Fund
category
% of
portfolio
Index fund (ticker) Actively managed fund (ticker)
Large-cap 43% Fidelity Spartan 500 Index (FSMKX) Mosaic Investors (MINVX)
Midcap 7% Vanguard Mid Cap Index (VIMSX) Meridian Value (MVALX)
Small-cap 6% Vanguard Small Cap Index (NAESX) Royce Pennsylvania Mutual (PENNX)
International 10% Fidelity Spartan Intl. Index (FSIIX) Vanguard Intl. Growth (VWIGX)
High-grade bond 20% Vanguard Tot. Bond Mkt. Index (VBMFX) Dodge & Cox Income(DODIX)
High-yield bond 8% Payden High Income (PYHRX)* Payden High Income (PYHRX)
Short-term bond 6% Vanguard Short-term Bond Index (VBISX) Vanguard Short-term Bond Index (VBISX)
*Actively-managed fund; no index fund available in this category.

Stage 3: Retirement »»

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More on MONEY Magazine's special report, The Dream Retirement »».

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