With the first wave of the Baby Boom generation reaching age 65 this year, Boomers need to take a close look at how they're investing for retirement. Unfortunately, popular wisdom on what you should do with your investment portfolio as you age won't necessarily fit with your own particular circumstances.

For decades, conventional advice has suggested that as you get older, you should follow an almost formulaic reduction in the risk level in your portfolio. For instance, one rule of thumb says that you should split your money between stocks and bonds, using your age as the appropriate percentage allocation to bonds. That rule is simple, but it's not nearly sensitive enough to the specific challenges each person faces in tailoring their investments to their needs and dreams.

A bad time for bonds
One problem with automatically moving most of your money into bonds as you age is that it ignores current valuations in the bond market. In other words, the simple rule of thumb has you own ever-increasing amounts of bonds without taking into account whether they're a particularly good investment.

Right now, as The Wall Street Journal recently explored, isn't a very typical environment for near-retirees trying to figure out how much of their money they should put into bonds. With interest rates still near historic lows, committing the bulk of your money to fixed-income investments means accepting some of the lowest income levels in decades. And perhaps more importantly, unless you plan to hold onto your bond investments until maturity -- a prospect that becomes less likely as you age -- you also face the possibility of suffering big losses on your bond holdings if interest rates start to rise.

In case you think those losses are only theoretical, take a look at what happened last fall. As the stock market began to rally, long-term interest rates rose, pushing some bond ETFs down significantly. And while bond ETF alternatives like SPDR Barclays High-Yield Corporate (NYSE: JNK) and iShares Barclays TIPS Bond (NYSE: TIP) have thus far held up well, given their correlation to rising prospects for higher-risk bond-issuing companies and higher inflation expectations respectively, higher rates could eventually sabotage the returns on those bond investments as well.

Making it work for you
Despite the appeal of a simple rule, you need a bit more complicated of an approach to determine the best investments for you. Basically, the variables involved include:

  • How much money you have compared to how much you'll need in retirement.
  • Your tolerance for risky investments.
  • Sources of retirement income other than investments.

These guidelines don't give you automatic answers, but they do force you to think about all the issues involved. For instance, some retirees will have enough income from Social Security and an employer pension plan that the primary purpose of their personal investments will be to cover unexpected emergencies. In that case, boosting risk really doesn't make sense.

On the other hand, if you have less saved up than you need, then you may need riskier investments to try to catch up. That doesn't mean shooting for the moon, though. For instance, Cisco Systems (Nasdaq: CSCO) and Starbucks (Nasdaq: SBUX) recently started paying dividends but still have some growth prospects to go with the healthy cash flow they generate.

In fact, dividend stocks can also be a good source of income for retirees. Cisco's and Starbucks' yields are both around 1.5%, but you can find plenty of other solid stocks yielding more than twice that. From health-care giant Abbott Labs (NYSE: ABT) to the ubiquitous McDonald's (NYSE: MCD) and ConocoPhillips (NYSE: COP), looking for big-time companies with a commitment to paying their shareholders can help you make ends meet after you retire.

Start saving the right way
Boomers have come a long way, and many of them still have plenty of time left before they can call it quits for their careers. By going beyond simple rules of thumb and making the right financial moves now, you can ensure that your retirement will be as comfortable as you can make it.

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