After the rally we've seen for nearly a year now, a lot of investors are breathing a sigh of relief for their retirement prospects. But even if the market's huge comeback has reduced the dent in your portfolio somewhat, you still face a big challenge in keeping yourself poised to retire rich.
Where we've been, and where we are
This time last year, investors were in a world of hurt. With the broad market down by more than half from their 2007 highs, workers had seen their 401(k) balances dwindle. Even retirees with more conservative investments felt the pain, as once-reliable dividend-paying stocks like Pfizer (NYSE: PFE ) and Wells Fargo (NYSE: WFC ) slashed their payouts, leaving shareholders with a huge cut in their income.
Now, though, things have gotten a lot better. The stock market has recovered just under half of its losses, and many workers have managed to come a long way back toward restoring the full value of their 401(k) accounts -- especially for those who kept making new contributions throughout the downturn.
Still, with many threats to other sources of post-retirement income, investors of all ages still have to be concerned about how they'll accumulate a good-sized nest egg and make it last for the rest of their lives. Here are three ways that will help you tackle that seemingly monumental task.
Appreciate your youth
If you have a long time before you need to worry about retirement, then you have the most flexibility in determining how you're going to prepare for it. Sure, your finances might not be in as good a shape as you would like -- but even small steps you take now will pay big rewards in the future.
Those under 50 need to focus on two things: eliminating debt and investing aggressively. Debt will suck the life out of your finances, and the faster it's gone, the more you can focus on the far more profitable task of finding great investments.
For those with a high risk tolerance, that should include small-cap stocks. Solid blue-chips like Johnson & Johnson (NYSE: JNJ ) and Kimberly-Clark (NYSE: KMB ) will likely deliver stable and healthy returns, but shares of large companies just don't have the same growth potential that tiny companies like deepwater oil producer ATP Oil & Gas (Nasdaq: ATPG ) or networking product-maker Netgear (Nasdaq: NTGR ) could deliver.
As you come within spitting distance of retiring, then the focus turns to risk management. You need to avoid unrealistically high assumptions about how much you'll be able to earn on your investments, because with a larger nest egg and shorter time horizon, you can't take as much risk. That doesn't mean running away from stocks entirely -- but it does mean adding a dollop of bonds -- perhaps through an ETF like iShares Barclays TIPS Bond (NYSE: TIP ) , which gives you some inflation protection as well as current income.
One thing many near-retirees have going for them is the fact that they're at their peak earnings power while their expenses may have fallen. If your kids have grown up and you have your house paid off, then you can afford to put a lot more money into tax-favored investments like 401(k) plan accounts and IRAs. Don't let an empty nest be an excuse to spend more -- set it aside and guarantee a happier retirement.
If you're already there
Retirees face the biggest challenge. If you're no longer working, then your income is mostly fixed -- Social Security, a pension (if you're lucky), and money from investments is all you have.
The first thing you need to do is chart your course. Many retirees are spending 10% or more of their nest eggs every year -- if you're one of them, then you need to realize that that rate of spending is unsustainable. Steps like a reverse mortgage or buying an immediate annuity to increase income are worth looking into, although they aren't the best option for everyone.
Even if your spending is under control right now, it may not be in the future. Look into long-term care insurance and Medicare supplemental insurance and see if paying a stable monthly premium could help you avoid an unexpectedly large medical expense down the road. Avoiding big expenses could be just the ticket to rescuing your retirement.
There's always something you can do to improve your chances of having a more comfortable retirement. The key, though, is to make the most of whatever time you have left. If you just ignore your financial problems and hope they'll go away, they'll just get worse. So don't procrastinate -- and have confidence that you can take steps that will make a difference in your golden years.
Sometimes the best advice isn't what you want to hear. Let Fool contributor Matt Koppenheffer show you why you'd better follow this annoying advice.