Nearing Retirement with a Skimpy Nest Egg

Karen Damato of the Wall Street has an interesting article on retirement savings. Retiring in 10 Years? Uh-Oh. Your nest egg is a lot skimpier than it should be. Here's what you can do now..

Imagine this scenario: You're only five or 10 years from when you hope to retire—but your portfolio looks like it needs another lifetime to bulk up. What do you do?

No. 1: If your nest egg is far smaller than you will need in order to comfortably leave the work force, investment returns alone are unlikely to bail you out. You need to get serious about trimming your spending to save more money, or resign yourself to working more years.

No. 2: When your nest egg is small and time is short, you can make things worse for yourself by being either too conservative or too aggressive.

Many pre-retirees hew to one extreme or the other. When Fidelity Investments recently studied participants in the 401(k) plans it oversees, it found that 28% of participants age 55 or older either had no money in stocks or 100% of their 401(k) balances in stocks. (The no-stock folks were slightly more numerous than the all-stock crowd, 15% to 13%.)One way to estimate the lump sum you'll need for retirement is to rough out how much money you'll need to pull from your portfolio annually when you retire—and multiply by the painfully large number of 25. That's based on the rule of thumb that you can probably withdraw 4% of your account value in year one and adjust that by inflation each year. (That assumes you're investing in a mix of stocks and bonds and want your money to last for 30 years.)

What that means for how you invest is this: If you have very little in stocks—say, because you fled equities amid the financial crisis of 2008—you can boost your expected return by adding some stocks to the mix. And by doing so, advisers say you'll probably be able to increase the cash you can safely withdraw. Even 20% of assets in stocks may make a difference.

But if you've already got a lot in stocks, increasing that bet further could backfire—making your returns so unpredictable that it actually reduces the amount of money you can safely withdraw from your portfolio.

Mr. Spiegelman of Charles Schwab advises that people within three to five years of retirement should have no more than 60% of their assets in stocks and preferably closer to 40%. By Schwab's math, stock exposure at just 20% of the portfolio can work, too, if you're willing to start off withdrawals at 3.8%, not 4%, of your nest egg.

Christine Fahlund, a senior financial planner at T. Rowe Price Group, concurs that "the sweet spot" for stock exposure is usually between 40% and 60% as people approach and enter retirement. At 10% or less in stocks, "you don't have the upside growth potential," she says. And if you have 80% or more in stocks, "you have so much volatility that to maintain [a high] likelihood of not running out of money, you can't withdraw as much."