Taking some risks with your investing is smart. But where's the line between too little and too much of a good thing?

Many investors dial up their risk tolerance to the max during their working years. As aging baby-boomers approach retirement, the big question they must face is whether they are putting too much of their money at risk by keeping their stock allocations high.

Making a change
Figuring out what changes you need to make to your portfolio when you retire isn't as simple as you might think. Obviously, without job earnings, retirees are much more dependent on their investments for regular income.

But given that many retirees can look forward to living 30 years or more after they quit their jobs, giving up on stocks entirely could prove to be far more dangerous than the risk of a stock market downturn. Facing that dilemma and finding a workable answer is essential for any baby-boomer who wants a secure retirement.

Tackling the tough issues
That's why Fool retirement expert Robert Brokamp decided to address stock allocations as part of his latest update to subscribers of his Rule Your Retirement newsletter. Because investors' comfort level with stocks changes dramatically depending on recent market conditions, tying people down to a fixed stock allocation that they can feel comfortable following through thick and thin can be a difficult task.

When stocks were doing well, many investors flocked to the strong returns that stocks offered. Yet as often happens during bear markets, investors who thought they understood the risks involved with owning stocks got a rude awakening when the strong performance in previous years abruptly came to an end in 2008. Take a look at the hits some widely held stocks took when the stock market turned sour:

Stock

Total Return 8/21/2002 to 8/21/2007

Total Return 8/21/2007 to 8/20/2009

AT&T (NYSE:T)

76.5%

(26.9%)

Caterpillar (NYSE:CAT)

269.5%

(34.5%)

Dow Chemical (NYSE:DOW)

68.9%

(42.9%)

Procter & Gamble (NYSE:PG)

56.6%

(13.4%)

General Electric (NYSE:GE)

36.1%

(60%)

Starbucks (NASDAQ:SBUX)

162%

(29.7%)

Boeing (NYSE:BA)

181%

(51.2%)

Source: Yahoo Finance.

Moreover, note that the most recent returns from the past two years include the huge rally we've seen since March. For a long time, investors had to face the prospect of even sharper declines. Because they're still shellshocked from their losses, many investors -- especially those in or approaching retirement -- feel less confident about their stocks than ever.

Finding a solution
To dig for the best answer, Robert consulted with certified financial planner and author Bill Bengen. Before 2008, Bengen had advised his retired clients to keep roughly half their assets in stocks, as a hedge against rising living expenses and long life expectancies.

Once the bear market began in earnest, though, Bengen made some important changes to his target stock allocations. The reason he did so has to do with the nearly unprecedented difficulties our economy faces today.

As Rule Your Retirement subscribers know from his past interview in early 2007, Bengen is among the pioneers of research about safe withdrawal rates. The general idea behind the concept is that if you look at past historical returns, you can determine how much you could have safely withdrawn from your portfolio each year during retirement and still had enough money to last throughout your lifetime. The number most often mentioned is 4% of your initial retirement portfolio, with withdrawals adjusted upward for inflation each year.

As Bengen points out, though, the current economic situation isn't one that we've regularly faced in the past. The dramatic events we've seen over the past two years resemble only one previous episode in the past 80 years: the Great Depression. And although you can draw some conclusions based on the assumption that things will work out roughly the same way they did in the 1930s, you can't have much confidence in conclusions based on a single time period.

Learn more
Robert ends his asset allocation discussion by revealing some adjustments he plans to make to the model portfolios he provides for his readers. To find out more about those changes, as well as how Bill Bengen has positioned his retired clients to deal with the financial crisis, you'll want to check out the latest Rule Your Retirement update.

Even if you're not already a subscriber, you can still read everything these experts have to say -- just click here to start a 30-day trial. It's absolutely free, and in addition to this update, you'll find a treasure trove of other valuable information. Check it out today.

Fool contributor Dan Caplinger took a big risk yesterday: he went with the Purple Cow ice cream instead of chocolate chocolate chip. It paid off though. He owns shares of General Electric and Starbucks. Starbucks is a Motley Fool Stock Advisor recommendation and an  Inside Value selection. Procter & Gamble is an  Income Investor recommendation. The Fool also owns shares of Procter & Gamble and Starbucks. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy gets it just right every time.