Double Your Next Egg

KIM NORTON SHOULD have had every reason to feel bullish about her retirement finances. She'd been dutifully contributing to 401(k)-type plans for almost 20 years, routinely hitting the maximum contribution ceiling as she built up a six-figure nest egg. But losing money in the tech bubble rattled her and eventually convinced her she'd need a bigger security blanket. And seeing her mother struggle with and succumb to cancer only confirmed that her instinct was right. "I'd see all these exorbitant medical bills coming in and wonder how regular people manage it," the 41-year-old divorcee says.

So in 2006, Norton decided to tear up the savings playbook. She pursued a rarely used strategy: buying property with her IRA funds and flipping it to earn big returns. Knowing she won't have a gold-plated pension like her mother had in retirement — and that she doesn't want to part with luxuries like weekly spa visits, nights out with friends and vacations in exotic locales like the Maldives — she's now resolved to build her nest egg to $2.5 million.

You don't have to be a globe-trotter — or conversely, living on ramen noodles — to be legitimately worried about financing retirement. And it's not just because the near bear market has taken a big bite out of many people's portfolios. Most experts say the next wave of retirees will need more money to cover their rocking-chair years than any other generation before them — by some estimates a lot more. Soaring fuel and food prices have reminded everyone how badly inflation can hurt a fixed income. Health care costs, meanwhile, have been outstripping inflation for years, and Fidelity now estimates that a 65-year-old couple who retire in 2008 will need $225,000 just to cover their out-of-pocket health care costs. (Cash out at 55 and you could need much more.) Companies are also increasingly dropping pensions. And as workers prepare to pay for their own retirements, longer life expectancies add another strain: The average retirement today lasts 20 years, up nearly 50 percent since 1970. All that has bred pessimism among experts like Alicia Munnell, director of the Center for Retirement Research at Boston College, who refers to the era when the baby boomers' parents left work — with pensions — as "the golden age" of retirement. "Some of these boomers," Munnell predicts, "are going to see really tough times."

But even with the economy in the doldrums, many people are finding ways to throw their future a life raft. SmartMoney talked to several retirees and soon-to-be retirees who managed to double their nest eggs within an eight-to-10-year period or are on the path to doing so. Some of them took traditional routes: The basic law of compounding, after all, means any investor who earns a very attainable 7.5 percent annually will double their portfolio in a decade. Others are venturing into lesser-known territory, creating their own small-business pension plans or using their IRAs to invest in riskier assets. In the fight to supercharge your savings, says Scott Kane, a founder of the networking and job placement firm Gray Hair Management, "sometimes you just have to get pretty creative." Whether you think you're on track to fund a mega-expensive retirement or you're looking for inspiration, you'll find some useful ideas below.

SallyAnn and Michael Gowen, a couple in rural Staunton, Va., have seen their share of financial ups and downs. Six years ago they dipped into their savings so Michael, an optometrist, could buy his own practice. Months later they lost most of what was left when MCI's stock crashed; soon they were tapping their retirement accounts just to pay staff salaries. "I had friends that looked at what we were going through and said, 'My God, I'd shoot myself,'" Michael, 48, recalls. But thanks to some hard work and creative staffing — SallyAnn does the books, the kids sweep the floors — the practice has taken off. Still, the Gowens have also dreamed of cashing out in their mid-50s, and with two kids to put through college, their savings are far from ready for such a move.

They're tackling the problem with the kind of aggressive investing strategy that most people associate with 30-year-olds. While most people tend to make their portfolios more conservative as they draw closer to retirement age, historical returns suggest that those who want double-your-money growth from traditional investment vehicles will need to keep more of their assets in the stock market. Right now the Gowens' portfolio is 75 percent in stocks, with about half that in international markets. It's a mix that would've returned a galloping 9 percent annual return over the past 10 years; they're hoping it can do the same once the current market choppiness is over. Every time the Gowens get dividend income, it's immediately reinvested, and they max out their IRA contributions at the start of each tax year so their money has more time to compound. With a portfolio like this, market volatility is the big danger: If the markets sink just as the investor hopes to retire, the nest egg can suddenly seem very skimpy. The Gowens at least have a safety net; they own some local commercial property that can support them if their portfolio turns sour.

For those without quite as high a tolerance for risk, most advisers say greater diversification is still the magic that'll double a nest egg, as long as you have the patience for a time frame of 10 years or longer. The meaning of diversification has changed in recent years, however, adding a degree of difficulty. A decade ago investors could have felt confident approaching retirement with a mix of large-company foreign and domestic stocks, as well as corporate and government bonds. Today, advisers say, investors have to go farther afield to insulate themselves from turbulence in the U.S. economy and what many think will be low returns from American stocks in the near term. "With globalization, it doesn't matter where large companies are based anymore, so you don't get the diversification with them that you used to," explains Paul Baumbach, a financial planner with Mallard Advisors in Newark, Del.

Baumbach has been moving clients into international small-cap mutual funds as a hedge against trouble in the U.S. markets. Two funds he's watching, Artisan International Small Cap and Hartford International Small Company, had trailing annualized returns of 13 percent and 20 percent, respectively, over the past three years, compared with the broader market's 4.5 percent. Small-cap stocks tend to deliver roller-coaster ups and downs, however; many advisers recommend balancing them with investments that are less volatile. Diane Pearson, an adviser in Pittsburgh, has been recommending international real estate investment trusts and exchange-traded funds that focus on foreign currencies, but her volatility killers of choice are so-called long-short funds, which are designed to avoid big losses in markets like today's. "There are always going to be cyclical bear markets," says Pearson, "and when those hit, these long-short funds are likely to do better."