Shielding your nest egg

NEW YORK (Money) -- Question: I'm 34 and am concerned about how to invest my retirement savings in this market. I currently have 100 percent of my portfolio in a mix of funds that invest in large-to-small-cap stocks as well as international funds. But I'm wondering how much I should change that mix given these turbulent times. What do you suggest? - Brian, Mitchell, South Dakota

Answer: I'm sure it comes as no surprise that you've got a lot of company out there when it comes to worrying about your retirement investments. I've been getting emails from lots of people facing a variety of different situations. But what they all have in common is a deep-seated concern about losing their hard-earned nest eggs - and uncertainty about how they should react in this tumultuous market.

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So rather than just respond only to your particular query, I'd like to offer advice to people of varying ages and at several different stages of their retirement planning - specifically, people who are just starting out in their careers, people who are roughly mid-way through, those who are approaching retirement and people who are already retired.

Think of it as the "Ask the Expert Retirement Portfolio Check-Up for a Shaky Market."

If You're At the Beginning of Your Career: People who are investing for retirement and are still in their 20s and 30s should be the least concerned about the short-term ups and downs of the market.

That's not to say it's not scary to see the Dow drop 1,665 points, or 12 percent, as it did between mid-July and mid-August. And, despite recovering most of that ground by last week, it's quite possible that the market could see more dips in the weeks or months ahead.

Indeed, depending on how things work out in the housing and credit markets, we could even see a steeper decline. Which is hardly surprising. We've seen precipitous drops in the past, and we'll see plenty in the future. But when you're still early in your career, you've got two to three decades of investing ahead of you.

That means two things. First, the money you already have invested in your 401(k) and other accounts has plenty of time to recover from stock-market setbacks.

And, second, you'll also be investing lots of new money. And to the extent that you invest new dollars after a decline, you'll be buying in at lower prices, boosting your potential return for that new money.

In terms of your investing strategy, you want to avoid getting rattled by the current turmoil and, instead, keep your focus on long-term growth, which you'll need to build a nest egg that can support you for 30 or more years of retirement.

That, in turn, means keeping a stocks-bonds mix that is predominantly tilted toward stocks.

Exactly how much you should keep in stocks is largely a matter of how anxious you think you would get seeing the value of your stock holdings take a major hit on the order of 20 percent or more. I know that a lot of young investors think they can handle the volatility of a portfolio that's invested 100 percent in stocks, but I'm not so sure.

I think people tend to overestimate their appetite for risk in good times, only to find themselves bailing out when faced with the harsh reality of a loss of 20 percent, 30 percent or more. So I'm more inclined to recommend a max of 90 percent in stocks (diversified, as in your case, among large- and small-caps, domestic and foreign shares) with the rest in bonds. And I would go with that high a percentage only if I felt I wouldn't panic and sell in a severe downdraft.

If you're more of a nervous type, then you might want to dial back your stock holdings a bit, say, to 80 percent or so to give yourself a bit more protection. If you're really cautious, you can pare back your stock holdings even more. But you don't want to wimp out and go much more toward bonds because then you reduce the chances of building a nest egg large enough to support you comfortably in retirement.

If You're at Mid-Career: By this point you've got some decent balances in 401(k)s, IRAs and other retirement accounts. And understandably, you don't want a meltdown in the markets to vaporize a good chunk of the money you've already tucked away.

At the same time, though, you've got a good many years before calling it a career, so your primary goal is still long-term growth. Which means you can't afford to start playing it too safe.

So even though you may be tempted to start plowing more of your money into safer havens like bonds or money-market accounts when the stock market starts yo-yoing around, you've got to resist that urge.

Giving into it could cost you dearly in long-term returns and leave you approaching retirement with a nest egg too small to fund the lifestyle you want.

That said, you don't want to be quite as aggressive as you were when you were just beginning your career.

So assuming you've still got another 20 or 25 years or so until retirement, you should still be keeping roughly 75 percent to 80 percent or so of your portfolio in stocks, again, the exact percentage depending on how well you feel you would handle a short-term setback in the value of your accounts.

If You're Nearing Retirement: Once you're within 10 years or so of calling it a career, you've got to strike a balance between the need to continue growing your nest egg and the need to protect it against big losses in the home stretch to retirement. That can be a tricky proposition.

You want to insulate your portfolio more from the ups and downs of the stock market than you did earlier in your career. So there's a natural tendency, especially in volatile markets like today's, to want to err on the side of conservatism.

But at the same time, you don't want to give up too much in returns. After all, the balances of your retirement accounts have likely gotten to be quite large by now, which means the returns you earn in the last 10 or so years before retiring may very well boost the value of your nest egg even more than the money you're saving each year.

As a practical matter, the best way to achieve the balance between growth and a decent measure of protection is to devote something like 65 percent or so of your portfolio to a broadly diversified group of stocks, while keeping the rest in short- to intermediate-term bonds.

That sort of blend should be enough to give you some decent growth in the last stage of your career, but also provide you with enough protection so that your portfolio would still have time to bounce back from any significant stock-market setbacks.

One caveat: Many people at this stage of their careers find that, for whatever reason they haven't accumulated enough savings to retire comfortably. And too often, the response is to try to boost the value of their nest egg by plowing money into investments that purport to offer higher returns.

This can be a big mistake since higher returns come with bigger risks, and the chance that the investment may backfire, leaving you with big losses.

So if you've put money into riskier vehicles in an attempt to boost returns in the last few years, now is the time to re-assess whether they're still worth holding. Because if the market deteriorates from here, the dicier investments are the ones that are likely to take the biggest hits.

The better course to take if you find your nest egg isn't quite as large as it should be is to crank up your savings.

If You're Already Retired: Clearly, this is the time when you have the least margin for error. After all, if you suffer big investment losses during your career, you can wait for a rebound in the market to bail you out, plus you can always replenish your retirement accounts by saving more.

You don't have those options, or at least not to the same degree, once you've retired. Still, with life spans being what they are these days, there's a good chance you'll spend 30 or more years in retirement. So you can't just take your retirement accounts and hunker down in bonds and money market funds.

To keep your spending power in line with inflation, you still need some long-term growth.

If you're, say, 65 years of age and just entering retirement, you can get that blend of growth and protection against market setbacks by keeping roughly 50 percent to 55 percent of your assets in stocks and the remainder in short- to intermediate term bonds. (Within the non-stock portion, you may want to keep 12 to 18 months' worth of spending cash in a safe stash like a money-market fund.)

You can then gradually decrease your stock holdings as you age, reducing your equity stake to, say, 20 percent to 30 percent of your portfolio by the time you're in your 80s and eventually holding it at about 20 percent.

Aside from your asset mix, however, you also want to keep careful track of the withdrawals you make from your investment accounts. I've written many times about the 4 percent withdrawal strategy, and how you may want to use it as a general guideline for getting the spending cash you need with reasonable assurance that you won't run through your savings too quickly.

But volatile markets like today's represent a special challenge for retirees.

The reason: if you experience a big stock-market loss in the initial years of retirement, the combination of withdrawals and market losses could so deplete your portfolio's value that your retirement accounts could have a hard time recovering even when the market rebounds.

And that would increase the risk of running out of money before you run out of time. To avoid that unwelcome possibility, you may want to consider paring back a bit on withdrawals during times the market is going through a rough patch.

You can also get a sense of how long your savings are likely to last at a given withdrawal rate, by going to T. Rowe Price's Retirement Income Calculator. I recommend doing this at least every couple of years and especially in the wake of a significant market setback.

As an additional measure of security, you may also want to consider putting a portion of your retirement savings into an immediate annuity (aka an income or payout annuity). This type of annuity can guarantee you monthly income for the rest of your life, plus combining an immediate annuity with a portfolio of stock and bond mutual funds can reduce the odds that you will outlive your savings. For more on this option, click here.

So there you have it - a check-up for the four main stages of retirement planning.

I've never been one to make short-term predictions about the stock market. But given the level of fear and uncertainty that I see today, I wouldn't be surprised if we see more stomach-churning drops in the stock market in the months and weeks ahead. But that's to be expected. It's a natural part of investing.

The important thing is that you go into the weeks and months ahead with a coherent strategy and asset mix based on your tolerance for risk and the length of time you have until you plan to retire. And then stick to your strategy even if everyone around you seems to abandoning theirs.