Retirement Guide for 40- and 50-Somethings

While your quickly-diminishing 401(k) may make you think you've sealed the deal on working until the day you die, things aren't quite as bleak as they may seem.

In fact, 40- and 50-somethings who play their cards right can enjoy retirement pretty much on schedule (give or take a few years). Not only do they have 15 to 20 years until retirement, but they also have another 10 to 20 years after that before they withdraw most of the money from their retirement plans. That leaves plenty of time for the market to recover -- and for their portfolios to their recoup losses, says Bill Hunter, vice president of retirement products at Fidelity Investments.

“It’s painful to look at your declining balance, but there is a sense of comfort that your time horizon for investing is still extremely long,” he says.

To ensure your portfolio is poised to take advantage of a market rebound, make sure you take into account the age at which you plan to retire, your risk tolerance and the lifestyle you want to live come retirement (are you planning to cruise around the country in an RV? Or live on the back nine at a world-renowned golf course?).

Here’s how to improve your odds of retiring when you want to -- not when the markets dictate.

Generally speaking, people in their 40s and 50s should be saving at least 15% of their gross annual salary each year for retirement, says Stuart Ritter, certified financial planner at T. Rowe Price (TROW). That’s assuming that you’ve been stashing 10% to 15% away since your 20s and 30s. Otherwise, it's time to start stepping up your contributions even further.

A 40-year old who was saving in his 20s and 30s but not quite enough to reach the recommended amount should start saving about 20% of his salary in order to have enough for retirement at age 65, while a 50-year old would have to stash away about 30%. The picture is even bleaker for those who haven’t started saving at all. The 40-year old would have to sock away 25%; while the 50-year old would have to save 55%, says Ritter.

To help get your portfolio's holdings up to speed, take advantage of catch-up contributions. Individuals who will be 50 or older by the end of 2009 can contribute up to a total of $22,000 to their 401(k) and up to $6,000 in a traditional IRA or Roth IRA.

Also, see if your employer offers automatic contribution escalation, under which the employer increases the employees’ contributions to their 401(k)s by about 1% a year, says Pamela Hess, director of retirement research at Hewitt Associates, a human resources consulting company. A little more than half of all mid- to large-sized employers currently offer such plans, according to Hewitt Associates.

Despite recent market losses, you still need to make sure you have enough exposure to equities to reach your retirement goals. “The question is: Where will these portfolios be 20 years from now?,” says Ritter. “Based on historical performance, the higher stock allocation will have the higher return.”

According to Ritter, people in their 40s should have 80% of their portfolio in equities with 20% in bonds. Those in their 50s should have 60% of their portfolio in equities and 40% in bonds.

Also, regularly check your asset allocation. The market’s wild ride has thrown many allocations off so it’s important to rebalance the portfolio every couple of months.

Even if the market rebounds tomorrow, most 40- and 50-somethings should plan on working longer than originally anticipated. “In general, they’re going to have to work another five years to make up for what they’ve lost,” says Hess.

Think of it this way: The extra money you save during those five years could make a world of difference. Say you were planning on retiring at age 62 but decide to work until 67. During each of those extra years you put 15% of a $100,000 annual salary towards a tax-deferred savings plan that currently holds $500,000. By age 67, you’ll end up with a nearly 40% increase in annual retirement income from investments, according to T. Rowe Price. (This is assuming an asset allocation of 40% stocks, 40% bonds and 20% short-term bonds and cash.) Click here to see how a few more years of work can help your retirement.

As of 2008, average out-of-pocket costs for health care during retirement are $225,000, says Hunter.

One way to help afford those hefty bills is to get long-term-care insurance, which covers expenses such as nursing homes and home health aids. One word of caution: Monthly premiums can be pricey. The earlier you sign up, the cheaper premiums will be, since they're partially based on your age. Click here for more.