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Retirement: The truth about the age guideline

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A common rule of thumb is to figure the percentage of stocks you should hold in your portfolio by subtracting your age from 100. It's not a bad guideline — it's just too conservative. Think of it as a baseline figure rather than a hard-and-fast rule.

Consider a couple who retire at age 65. With only 35 percent of their portfolio in stocks, says Evelyn D'Amico, a financial planner in Paoli, Pa., "their assets will have a tough time growing enough to keep up with inflation." D'Amico recommends that her clients have at least 50 percent of their retirement assets in stocks at age 65.

For a more aggressive guideline, modify the rule to subtract your age from 110, and then multiply that figure by 1.25, recommends Stuart Ritter, a financial planner with T. Rowe Price. Using that formula, our 65-year-old couple would keep 56 percent of their portfolio in stocks. For a 50-year-old, the stock portion would be 75 percent. If you can count on a traditional pension to provide a guaranteed annual income, you can afford to be even more aggressive.

Bear in mind that this rule applies to the long-term portion of your portfolio. Money you're saving for shorter-term goals that are fewer than five years away should be invested more conservatively.

Saving 10 percent of your income each year is a great habit to get into, and the earlier you start, the better off you'll be. Be aware, however, that you may have to adjust the amount depending on your savings goals.

Let's assume that your retirement goal is to live on 70 percent of your current income — adjusted for inflation — when you stop working. At age 30, you'd have to save 11 percent of your income to reach that goal, according to an analysis by T. Rowe Price. Wait until age 40 to start saving, and the percentage jumps to 21 percent. But if by age 40 you had already saved an amount equal to your annual salary, you'd need to set aside only 14 percent a year.

Of course, if you want your investments to provide more than 70 percent of your preretirement income, you'll have to bump up those figures. It's best to work with a financial planner or use a retirement calculator, such as the one at www.financialengines.com, to draw a more precise read on how much you'll need to save to reach your goal.