Retirement saving: How to catch up

(Money Magazine) -- Question: I read all the time that since I'm in my mid 50s I should be scaling back the equity holdings in my retirement account to 60% to 70% of its value. But I work in a job that I enjoy, that's stable and has no mandatory requirement age. I'm behind on my retirement savings, so I'm wondering if I should invest as if were younger, say, 40 or 45.

I'm sure there are a lot of people who are in my position who are wondering whether the conventional asset-allocation wisdom applies in our case. What do you think? -- Bill, El Paso, Texas

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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Answer: I think it makes sense to question the conventional wisdom, and it can often pay to flout it.

Still, in the investing arena particularly, you need to pick your shots. And I think this is one of those instances when you want to be very, very careful about doing so. And if you do decide to go ahead, think long and hard about how far beyond the bounds of convention you want to stray.

Before I get to why that's the case, let's start by admitting that there is no "correct" stocks-bonds mix for someone your age or, for that matter, any other age. The right mix can vary depending on how much risk you're comfortable taking, how much you have invested, how dependent you are on your investments and what other resources you have to fall back on.

All else equal, for example, someone your age who will be collecting a traditional check-a-month company pension can likely afford to invest more aggressively than someone who won't be.

That said, to the extent a consensus exists, you're right that it's in the neighborhood of 60% to 70% stocks and 40% to 30% bonds for someone in his or her mid 50s. For example, if you check out the target-date retirement funds designed for someone your age by big investment firms like Fidelity, T. Rowe Price and Vanguard, you'll find that they all fall within that range.

As you probably know, the rationale behind that sort of allocation is that someone at that age still usually needs stock exposure to grow his or her nest egg -- after all, your savings have to take you not just to, but through, retirement -- but also wants some bonds to provide a measure of stability and capital preservation.

So what you're proposing is tilting the scale more toward stocks in hopes of revving up the growth component a bit to make up for the fact that you haven't saved as much as you would have liked.

It's a tempting strategy. After all, stocks have a good record of delivering higher returns than bonds over the long-term. And higher returns on the money you've already saved and on whatever new money you add translates to a bigger nest egg when you eventually retire.

But buying more stocks doesn't automatically translate to higher returns. As we saw when stock prices plummeted from their peak in late 2007 to their low in early 2009, stocks can suffer devastating setbacks.

And those setbacks, as well as other factors, can sometimes result in disappointing, rather than superior, performance over longer periods as well. Over the past 10 years, the broad U.S. stock market has returned about 1% a year. The U.S. investment-grade bond market, on the other hand, has gained roughly 6% a year.

Some people, looking at stocks' dismal returns over the past decade, conclude retirement investors should avoid stocks altogether. As I noted in a recent column, I think that's going too far.

At the same time, though, I think it's important to be realistic about the potential risk in stocks, which, as I've previously pointed out, may be greater than we previously believed.

So I guess the question is how much, if at all, do you want to push it?

One way to think about that question is to look at how different mixes of stocks and bonds performed in the last downturn and ask yourself how you would feel going through a similar experience in the future.

A portfolio consisting of 65% stocks and 35% bonds -- that is to say, roughly in the middle of the consensus 60% to 70% stocks for someone 55 years old --would have lost a bit over 20% in 2008.

How would someone investing as a 40-year-old have done? Using target-date funds as a guide, someone who's 40 and investing for retirement might have a portfolio 85% in stocks and 15% in bonds. That blend, by contrast, would have been down a little over 30% in 2008.

Of course, it may be hard to realistically evaluate today how you might feel sustaining a 20% loss vs. 30%. After all, you now have the perspective of 20/20 hindsight and the comfort of knowing that, even though stocks haven't climbed back to their 2007 levels, the market has had a pretty good run from the lows of 2009.

If you remember back to those days in late 2008 and early 2009, however, the outlook for stocks and economy was dicey at best -- and anxiety was running high among retirement investors who feared their nest eggs might stay shrunken for a long, long time.

I think you also need to consider whether, just because there's no mandatory retirement age at your company, you're really in the same position from an investment standpoint as a worker 10 to 15 years younger than you.

I don't think you are.

Although you're implying you have the ability to work much longer (which in turn implies a longer investing time horizon, more time to recover from stock downturns and a portfolio with more stocks), that doesn't mean you'll actually be able to do it.

As stable as your job may be, you could be laid off and have trouble finding work at a comparable salary (which was the experience of many older workers in the past recession). Or a medical issue could force you out of work.

For that matter, despite your willingness now, you might not feel as up to another five or 10 years on the job when you hit your mid 60s. Indeed, the Employee Benefit Research Institute's 2010 Retirement Confidence Survey found that 41% of retirees said they left work earlier than planned. So I don't think you should assume that you'll have the same investing time horizon as someone a decade and a half younger than you.

All of which is to that while a little fine-tuning around the edges with your allocation might be okay, I'd think at least twice before I moved anywhere close to the higher-octane stocks-bonds mixes that are typical for investors in their 40s. And, in fact, before you even consider fooling around with your asset allocation strategy, I think there are two other moves you should try.

The first is increasing the amount you contribute to your 401(k) and other retirement accounts. Yes, I know it's not as instinctively appealing as having higher investment returns bail you out for falling behind. But it's a much surer way to ratchet up the value of your nest egg.

Besides, if you really think you might be able to work well beyond normal retirement age, say into your 70s, then you've still got a good 15 or more years to sock bucks away. Put your mind to it, and you can accumulate a hefty sum over that stretch from new contributions alone, not to mention the extra years of growth in whatever you've managed to save already.

Finally, see whether you can eke out higher returns by shaving some of your portfolio's costs. If you're like many mutual fund investors, you may be paying 1% or more a year in annual fund expenses.

By looking to index funds or ETFs, you can easily find investments with yearly tabs of 0.20%, or even less in some cases. Lower fees don't automatically mean you'll net higher returns, but it increases your odds. For a list of index funds, ETFs and other reasonably priced options, check out our MONEY 70 list of recommended funds.

So before you buck the conventional wisdom and get all "mavericky" in your investment strategy, consider these other approaches. You may find that you can actually improve your retirement prospects a lot more without taking on additional investment risk.