So far in 2007, most of the major stock indices are in the red.

Do you know where your retirement is?

That's the type of question on most investors' minds after their portfolios stumble. Many start to wonder: "I just saw my life savings drop 5% in one day -- am I going to have to work forever?" Those who have already retired ask: "My IRA just shrank by tens of thousands of dollars, and I have to withdraw money next week to pay the bills. Is my money going to last as long as I do?"

Those are understandable questions. And the Fool has the answers. By making the right changes to your portfolio -- as well to as a few other places -- you can still retire. The fact is, market returns are only one determinant of your net worth -- and they may not even be the biggest. By following these five steps, you can greatly improve your retirement prospects.

1. Get the right asset allocation.
We've all heard something along the lines of "asset allocation determines 93.6% of portfolio performance." That number comes from a study led by a fellow named Gary Brinson, along with two other fellows by the names of Hood and Beebower. Until he retired, Brinson managed more money than any other individual. Now, that statement simplifies the Brinson study quite a bit, but as Brinson recently told me in an email, "How one decides to allocate their portfolio assets across various markets is the primary determinant of portfolio performance and the risk profile of the portfolio using diversified asset classes."

Want proof? Consider these two charts, which I featured recently in my Rule Your Retirement newsletter.

Let's assume it's Jan. 1, 1972, and we have two individuals:

  • A saver who kicked off 1972 by contributing $5,000 a year to an all-stock portfolio and increased that amount each year for inflation. The saver contributed nearly $24,000 in 2006.
  • A retiree who began 1972 by taking out 4% of a $100,000 portfolio and adjusted that withdrawal amount each year for inflation. The portfolio is 40% intermediate U.S. government bonds, 60% stocks.

Let's assume that the stock portion of these portfolios is invested in large-cap U.S. stocks, the equity class that dominates most American investors' portfolios. Here's what their performance would have looked like as of the end of 2006.


Value at the
End of 2006

Compound Avg.
Annual Return

Worst One-Year

No. of Negative


100% large caps






60% large caps, 40% bonds





Sources: Ibbotson Associates; Morgan Stanley Europe, Australasia, and Far East Index; National Association of Real Estate Investment Trusts Index.

These folks aren't looking too shabby. The saver is a millionaire almost five times over, and the retiree has more than three times the original investment amount, even after decades of withdrawals.

But now, let's spice things up by cutting back on the large caps and adding U.S. small caps, international stocks, and real estate investment trusts (REITs):


Value at the End of 2006

Compound Avg. Annual Return

Worst One-Year Return

No. of Negative


50% large caps, 30% small caps,
10% Intl.,
10% REITs






30% large caps, 10% small caps, 10% Intl.,
10% REITs,
40% bonds





By the end of 2006, the saver has a 42% bigger portfolio, and the retiree has a 164% larger nest egg.

On one hand, this may not surprise you -- after all, many non-large-cap equity assets have higher long-term returns. But that's usually followed by pointing out that the better returns come at the price of greater risk.

That's true when you look at the volatility of individual asset classes. But when you look at risk in terms of frequency and magnitude of down years across the entire portfolio, the well-diversified nest egg suffered fewer and shallower drops. In other words, more return, less risk -- what more could you ask for?

(Want to read more of that article? You can do it right now, for free. Just click here for a free 30-day trial.)

2. Practice smart asset "location"
Deciding how much you should own of each asset is crucial; knowing which accounts -- your IRA, 401(k), or brokerage account? -- should hold which assets is also important. This is known as asset location. One study showed that putting the right eggs in the right baskets can add 15% to your after-tax wealth. Generally, this means keeping bonds in your retirement account and stocks that you hold onto for many years in your non-retirement accounts. However, there are some exceptions -- for example, municipal bonds should always be kept out of your retirement accounts, since they have built-in tax advantages that are essentially wasted when they're held in an account such as a traditional IRA.

3. Run your numbers
Are you saving enough to retire when you want? Are you withdrawing too much in retirement? There's one way to find out: Run your plan through a good retirement-savings tool. You can start by checking out some of the free financial calculators on the Internet. Since each will give you a different answer, try at least three.

You also might find some good tools on your broker's website or as part of your personal-finance software. (We offer several such tools at Rule Your Retirement, too.)

4. Stop paying for other people's retirements
A friend recently asked me to look at her 401(k) and IRA. Unfortunately, she was doing what most people are doing: paying too much for too little. Her funds charged the typical expense ratio -- about 1.5% -- but barely kept up with their bogeys. One fund charged 2.3% a year and got beaten by the vast majority of similar funds. By choosing much lower-cost but better-performing funds, she could add an instant 1% to 2% a year to her portfolio returns. Compounded over many years, we're talking tens of thousands of dollars. Here's the bottom line: Your retirement and those of the folks on Wall Street are inversely related; the more you pad their pocketbooks, the more you'll drain your portfolio.

5. Know how to crack your nest egg
Finally, the big day. You kissed the boss good-bye, and you're ready for a lifetime of ... well, whatever the heck you want. It's time to begin tapping your portfolio. But wait: Should you start with your traditional IRA, your 401(k), your annuity, or your regular brokerage account? This is no small matter. One study found that choosing the right order could extend a portfolio's life expectancy by more than two years. The general rule: Start with non-retirement accounts. After that, move on to tax-deferred money, and save your Roth for last. However, there are many exceptions to these rules, so take the time to learn more before you retire.

Start ruling your retirement
If you're looking for some more retirement tips, you can take advantage of a 30-day free trial to my Rule Your Retirement service. Click here to learn more.

Robert Brokamp is a former seminarian, financial advisor, pole vaulter, Captain Planet, and proprietor of a full head of hair. The Fool has a disclosure policy.