55 and scared: 'How do I protect my nest egg?'

@Money June 6, 2012: 11:41 AM ET

(Money magazine) -- I'm 55 years old and feel I can't afford to lose my savings if the market tumbles. What should someone 10 years from retirement do to protect her nest egg from the next downturn? -- Vicky I., Wheaton, Ill.

Given the recent lousy jobs report for the U.S., Europe's ongoing debt woes and the stock market's roughly 10% decline since the beginning of April, I can understand why you're anxious about market losses decimating your retirement stash.

But while protecting your savings from Armageddon in the markets is certainly one goal as you head into the home stretch to retirement, it's not your only aim. If it were, I'd tell you to just invest your nest egg in Treasury bills or FDIC-insured savings accounts and stop worrying. You wouldn't earn much -- maybe 0.5% or so -- but your dough would be safe.

Problem is, that with at least 10 more years of investing before you retire and maybe another 25 to 30 years after retiring, you can't afford just to huddle in the most secure accounts.

If you want your nest egg to support you over the course of a long retirement, during which inflation could conceivably double your living expenses, you're going to need at least a little bit of capital growth from your retirement investments.

So the question for you is this: How do you balance your goal of safety with the need for some growth?

The answer lies in assembling a mix of stocks and bonds that can prevent a market selloff from vaporizing your savings while simultaneously giving you a shot at returns high enough to maintain your purchasing power in retirement.

Unfortunately, as much as I'd like to I can't give you the stocks-bonds blend that's right for you. The mix that's appropriate will depend on such factors as how large a nest egg you have (the more money you have, the more you can likely afford to invest in stocks), how much risk you're willing to take (the more anxious you get when your savings balance falls, the less you'll want to put in stocks) and what other resources you have to fall back on (if you have a pension or lots of home equity you can tap, you can devote more to stocks).

But I can suggest two ways you can get a decent sense of how to divvy up your savings. The first is to check out a target-date retirement fund. For example, Vanguard's Target Retirement 2020 fund (VTWNX) -- which is designed for people in their mid-to-late 50s planning to retire in 2020 or thereabouts -- has about 65% of its assets in stocks and 35% in bonds. You don't have to adopt that mix exactly. But you can use it as a starting point and then raise or lower the stock percentage depending on your tastes.

The second way you can arrive at a suitable stocks-bonds mix is to go to a tool like T. Rowe Price's Retirement Income Calculator. After plugging in information like the amount you already have tucked away, the percentage of salary you plan to save each year, how much annual income you think you'll need in retirement and how your savings are currently invested, the tool will estimate the probability that you'll be able to get the income you need throughout retirement. By trying different asset mixes, you can see how your chances of getting the income you need improves or declines.

As you go through this process, remember that playing it too safe might allow you to feel less anxious today, but could increase your risk of running short of money in retirement.

Get too aggressive in pursuit of better returns, on the other hand, and a market downturn could deliver a blow so severe that your nest egg may never fully recover. So shoot for an acceptable middle ground.

Whatever portfolio mix you eventually settle on, you'll want to gradually shift more of your money toward bonds (and once you retire, toward cash as well).

And once you've actually retired and security becomes an even more pressing issue, you might want to consider other moves, such as investing a portion of your savings in an immediate annuity that can provide an assured level of income beyond what Social Security can provide.

Just don't make avoiding losses the sole focus of your retirement investing strategy. The more successful you are at doing that, the less likely your nest egg will be able to support you down the road.

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