5 retirement choices: Get 'em right, live well

  @Money February 11, 2013: 12:26 PM ET
saver investor ask

From the years you spend tending your portfolio to the time when you get to enjoy sweet success, you face choices about your retirement investing.

NEW YORK (Money Magazine)

Making better decisions can dramatically boost your income in retirement, a new study finds. That's not exactly earth-shattering news.

What may surprise you are which decisions matter most, according to researchers at Morningstar.

They are not the kinds of choices you may obsess about, like whether to buy Apple (AAPL, Fortune 500) stock or where to find the next hot emerging market.

Rather, the most crucial decisions involve more fundamental issues, like how you manage your 401(k) plan. The idea of making savvy choices applies to all phases of planning.

So, based on what I've learned writing my Ask the Expert column, I came up with these five big decisions you need to get right before and after you retire.

1. Are you a saver or an investor?
2. How should you divide up your money?
3. How much help do you really need?
4. What's the best use of tax-deferred plans?
5. How much can you draw from your savings?

Decision No. 1: Are you a saver or an investor?

The decision: When you sign up for a retirement plan or use an online calculator to track your retirement progress, you must decide how much to save and how to invest those savings. It may seem counterintuitive, but your savings rate is by far more crucial.

Related: Your future self thinks you should save more

Why it's important: Even though history shows that tilting a portfolio toward equities generates higher returns, loftier gains are hardly guaranteed -- witness the 3.4% annualized loss you would have suffered by investing in the S&P 500 index from March 1999 to March 2009. And investing too aggressively leaves you more vulnerable to downturns like the near 60% drop in the 2007-09 bear market.

Ratcheting up the amount you sock away is a surer way to improve your chances of achieving a secure retirement. Increasing how much you save every year has a much bigger impact on your eventual retirement security than investing more aggressively does. The reason: While shifting more savings to stocks enhances return potential, it also increases volatility, which dilutes the effectiveness of a stock-heavy portfolio.

Related: Long-term investing -- Keep it simple

Saving more has another benefit: You can afford to invest more conservatively. By saving 20% a year for 30 years -- a high bar, for sure -- you can trim stock holdings to 60% and still have the same high chance of success you would have with an 80/20 mix.

The right investing strategy for you

Best move: Aim to save 15% or more a year. You'll improve your odds of retiring in comfort and be less vulnerable to the vagaries of the markets.

See more decisions you need to get right

How should you divide up your money?

How much help do you really need?

What's the best use of tax-deferred plans?

How much can you draw from your savings? To top of page

The most powerful tool you have
The amount you save is more crucial than how you invest. Plus, counting on high returns to overcome paltry savings can be costly.
With 70% in stocks and saving.... Chance of money lasting
10% 54%
12% 62%
15% 73%
If you instead keep saving 10% but increase stock stake to... Chance of money lasting
70% 54%
80% 57%
90% 59%
And that aggressive portfolio carries a higher risk of a big hit.
Stock allocation 2007-2009 bear market loss
70% -33%
80% -39%
90% -45%
NOTES: Assumes salary of $50,000 at 35 and $55,000 saved, retiring at 65 with 75% of income, and money lasting until age 95; 50/50 stock/bond mix after retiring. SOURCES: T. Rowe Price, MONEY research

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