Retirement investing: catching up

@Money January 23, 2012: 5:03 PM ET

NEW YORK (CNNMoney) -- I'm 57 and hoping to retire at 68, but I'm behind on my retirement savings. Should I invest as if I were younger and shift more into stocks to help increase my 401(k)? -- Jeff Branstrator, Greensboro, N.C.

At first glance, your strategy of loading up on equities to quickly bulk up your 401(k) and retire on schedule sounds smart. After all, stocks usually generate the highest returns.


Problem is, stocks' impressive long-term gains are sometimes interrupted by decade-long stretches when they languish. Far from churning out their historical 10% annualized gains since 1926, stocks lost 10% from the beginning of 2000 through the end of 2009.

Worse yet, equities periodically go into gut-wrenching nosedives, like the 50%-plus plunge from 2007 to 2009. Hit a patch like that as you near retirement, and a stock-heavy portfolio may work more like an anchor than a life preserver.

Even if you're fortunate enough to skirt a market stall or a hammering, shifting to a more aggressive allocation may not be the panacea you think. Saving more and postponing your retirement by a few years if you can -- many workers retire earlier than expected -- are safer and more effective than any portfolio moves you can make.

To illustrate, take the case of a hypothetical retirement saver who's also 57 and has $400,000 saved. While that nest egg seems sizable and far exceeds what many have, it falls short of widely used benchmarks for his age.

As you can see from the graphic, funneling more dollars into his 401(k) every pay period nudges up his chances of reaching his retirement goal -- but only marginally so. That's largely because retirement is near. Starting to salt away more, say, in his early fifties would have had a bigger impact.

Getting aggressive with his portfolio helps too but carries more uncertainty and the risk of a lower income if a bear market strikes again. The extra savings option is a better move, but neither shift ensures a secure retirement at age 65.

What really helps is what you're already planning to do: working longer. This strategy has a two-pronged effect: More time on the job means more years of 401(k) contributions and investment re-turns; plus working three years longer increases the Social Security benefit by 25% or so.

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So rather than going pedal-to-the-metal with your 401(k) investments, I recommend that you put 60% of your portfolio in a broadly diversified portfolio of stocks and the rest in bonds -- a reasonable mix at your age. Then hike your savings rate, and stick with your plan to work longer.

That strategy, which you can test by going to T. Rowe Price's Retirement Income Calculator, will give you a better and safer shot at accumulating the nest egg you need. To top of page

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