Rethinking your retirement By Geoff Colvin, senior editor at large

(Fortune) -- Admit it: You feel you've been lied to. Hapless, humbled retirement investor, you were told that stocks are your best investment for the long run. But the S&P 500 has gone exactly nowhere in 12 years; maybe the long run is longer than you'll live. You were told not to try timing the market, but if you didn't break your kids' piggy banks and pile into stocks when they bottomed on March 9, 2009, you're wondering if you'll ever be able to retire. You were told that your income and therefore your tax rate will be lower in retirement, but it looks as if only half of that will be true. You were sold a bill of goods! And now ... who can you trust?

The answer is that despite your feelings of betrayal, the classic advice is still valid. Most of us just haven't thought deeply enough about what it means in today's global economy. Yes, you can still win at investing for retirement. But as this special Retirement Guide shows, we all need to think differently about how we do it. Specifically, we'd better rethink the three most fundamental factors in our retirement's financial success: how we invest, save, and live.

Invest more broadly.

Diversification is ancient advice, yet most investors are still pathetically undiversified. They think that owning a wide selection of U.S. stocks plus a few bonds will do the job. Yet stocks and bonds are only two asset classes among many, and the U.S. is less than one-third of the world economy. True diversification means thinking much, much bigger.

That's now far easier than it used to be. When celebrity investor Jim Rogers decided to diversify radically 20 years ago, he rode his motorcycle around the world for almost two years, making investments on the spot. Today you can invest in a range of assets globally from your desktop through hundreds of targeted funds. Asian real estate, American livestock, British bonds, copper -- investing in such assets used to be almost impossibly difficult for individual investors. But today you can own all of them and many more, often through low-cost index funds. Now you're talking real diversification.

Besides, where has most of the world's growth been in the past decade, and where will it be in the next? We all know the answer. (See "Brazil and India Emerge" for guidance on smart investing in developing markets.) Consider that if you had really diversified just your stock investments a decade ago, only a small portion would have been in the lousy S&P 500 (down 19%). Sure, you'd have owned some of the similarly awful Japanese and Western European indexes. But you'd also have been in Indonesia (up 461% over the past decade), Argentina (up 421%), and South Korea (up 132%). Genuine diversification can prevent a ton of pain.

Save more ferociously.

You've been told to save since you were a tot, but again, most of us take far too pinched a view of it. America's personal saving rate fell below 2% near the end of the latest expansion and in some months even went negative for the first time since the Depression. Much was made of its subsequent rise to 5% during the recession. Wonderful -- but for perspective, remember that China's personal saving rate is around 40%. The Chinese aren't counting on their government for much help in retirement. It's true that some folks in Washington are trying to look out for us (see "The Senator Who Wants to Save Your Retirement"). But in light of all we've learned about the long-term future of Social Security and Medicare, maybe we have something to learn from China's savers.

We've gone wrong on saving in two big ways. First, we mistakenly believed that rising asset values -- stocks in the '90s, homes in the past decade -- were doing our saving for us. Not so; real saving is taking money out of current income and putting it away. Most Americans stopped doing that. Second, many of us forgot that saving is a net figure, offset by borrowing. It's great to max out your 401(k) contribution, but if you're also racking up credit card debt or taking a home-equity loan, as millions of Americans did, then you aren't saving anything.

Live more simply.

Living beneath your means is another bit of foundational advice that many forgot. We've often read that consumer spending accounts for 71% of America's economy, but it isn't really true. That proportion, reached only at the tippy top of the last expansion, was unprecedented in the previous 70 years. We were drunk with shopping. So we not only undersaved but also formed insanely unrealistic views of the lifestyle we could afford, setting ourselves up for a disappointing or even disastrous retirement.

There's more to life than consumption -- ask your parents or grandparents -- and some of the greatest experiences don't cost a thing. Another factor that could dial down your planned retirement lifestyle is actually the news that David Stipp reports in "The Anti-Aging Revolution": Your savings may have to last a lot longer than you expected.

Truth is, the classic advice is still your best route to a great retirement. We weren't really lied to. We were just given a new challenge: thinking differently about what the old rules mean in a new world. To top of page

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