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.

chart-catch-up-2.gif

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.

Ask the Help Desk your money questions

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

Help! We need a makeover
Young dad, $15,000 in credit card debt
Readers' Choice

Carlos Rodriguez is trying to rid himself of $15,000 in credit card debt, while paying his mortgage and saving for his son's college education.

$400,000 portfolio, too many holdings
Readers' Choice

Susan Carson and Laura DeLallo make $225,000 and have half a million in retirement savings, but their sprawling portfolios is proving hard to manage.

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.95%3.98%
15 yr fixed3.08%3.04%
5/1 ARM3.43%3.30%
30 yr refi4.04%4.05%
15 yr refi3.17%3.11%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
CNNMoney Sponsors

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.