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Increase investment in stocks

How you invest in retirement has become a whole new ballgame. After all, retirees are living the nightmare of the worst bear market since 1937-38. What steps should you take in retirement so you don't have to worry and scrimp? How can you invest more wisely?

First, the good news. This bear market, if it didn't end last Oct. 9, is on its last legs. Although you can't expect to get the 20-percent-plus annual returns of the late 1990s, it's reasonable to count on long-term annualized growth of 10 percent or so in the years ahead, while bonds should return about 4 percent.

As the market continued to fall last year, some retirees retreated to the warm blanket of bonds. But the worst thing for investors in retirement to do now is forsake stocks.

"In early 2000, investors didn't understand risk," says Tobias Levkovich, chief market strategist for Smith Barney. "Now they're unwilling to take any risk."

The first step for savvy investors may sound downright frightening: Put more of your money into stocks and stock funds than usual. Why? After devastating bear markets, stocks tend to do better than average in the succeeding years.

Too much risk for you to stomach? Then at least rebalance your assets. For example, if you started 2000 with 50 percent in stocks and 50 percent in bonds, the brutal winnowing of stocks may mean you now have 65 percent in bonds and 35 percent in stocks. Rebalancing forces you to sell high and buy low. At this point, that means sell bonds and buy stocks.

You need stocks because your money needs to last for many years. The life expectancy for retirees is long — and growing longer with medical advances.

During the early years of retirement, put 50 percent of your investments in stocks. The rest belongs in bonds and cash investments, such as bank CDs and money-market funds. If you're a reasonably aggressive investor, you'll want to put 60 percent in stocks. If you're more conservative, invest 40 percent in stocks.

"When you go below 40 percent in stocks, you run into inflation risk," says Todd Cleary, chief financial planner at T. Rowe Price.

In the later years of retirement — say, after age 75 — investors should reduce the allocation to stocks by about 10 percentage points.