Investing for early retirement

Aggressive investing could help you retire early, but taking on too much risk could backfire.

Question: I'm 46 and have about $350,000 set aside in my workplace retirement savings plan in what I would call a moderately aggressive mix of stock and bonds funds.

I contribute the maximum every year to this plan, and my wife and I also contribute to Roth IRAs (although not the max).

Since there's a mandatory retirement age of 57 at my job, I'm wondering whether I should "bite the bullet" and invest in an even more aggressive mix to maximize my investment earnings over the next 11 years. I think I'm on the right path, but I'd love to have the "warm and fuzzy" feeling of knowing things will look rosy for me when I turn 57. - Michael S.

Answer: It sounds to me as if you're already on the right path.

But as I pointed out in a recent column, early retirement is a tough act to pull off. And I'd hate to see you mess things up now by adopting too aggressive a stance with your investments.

An investing strategy isn't like the sound control on an iPod, something you can ratchet up at will and automatically generate more volume (or a larger nest egg account balance).

The simple fact is that higher investment returns go hand in hand with higher volatility. And even if you're okay with the idea of your retirement account balances bouncing up and down a lot more in the short-term, higher volatility also translates to a wider range of possible outcomes in the long-term.

So while being more aggressive does give you a shot at having a much larger nest egg by age 57, taking on too much risk could also backfire and leave you with a much smaller nest egg than you anticipated.

You don't say how your retirement savings are actually split up between stocks and bonds, so I don't know what your idea of "moderately aggressive" is. That makes it hard for me say how much leeway you have in shifting your strategy from where it stands now.

But I can tell you that, generally, someone your age should have somewhere between 75 percent and 80 percent of his or her retirement savings invested in a broadly diversified group of stock funds, and the remainder in bonds.

For more details on how that mix might look and what sorts of stock and bonds funds it should include, I suggest you take a look at the target-retirement funds section at T. Rowe Price and Vanguard. Just choose a fund with a date that roughly corresponds to the year you think you'd like to retire.

You can certainly tweak your mix even more toward stocks than these funds do in hopes of earning higher returns and bulking up your retirement accounts.

But just remember that if you go too far, your nest egg could take a big hit if the markets turn against you. That could be especially problematic if your accounts suffer a big setback just before you plan to retire.

It's also important to remember that a retirement investing strategy isn't something you set in a vacuum. So before you start fiddling with your asset mix, you'll want to review your overall retirement plan.

3-part plan

You can do that by taking these three steps: First, do a retirement reality check. Here, the idea is to get a reasonable evaluation of whether retirement at age 57 is a realistic option for you given how much you and your wife have already saved and how much you're still socking away.

You can get a quick estimate of whether you'll be able to make an early exit by checking out our "Can You Retire Early?" calculator, which tells you roughly how much money you need to have set aside today to have a good shot at retiring by age 60. But this is really more of a back-of-the-envelope approximation.

To get a more accurate assessment, you need to go to a calculator that allows you to plug in more of your financial information (retirement account balances and such) as well as details such as how much income you'll need in retirement and the various sources (Social Security, a pension, withdrawals from retirement accounts) that might provide it.

Two such tools that allow you to do this sort analysis are our Retirement Planner and Fidelity's myPlan Retirement Quick Check. Both are free, although you must register at Fidelity's site to use its tool.

If you're uneasy doing this sort of thing on your own, or you simply want a pro's opinion, you can always seek an adviser's help. (More on getting an adviser's help.)

Second, have a plan B in mind. Despite your best efforts, you might not have the financial wherewithal to fully retire in your 50s. So if you really have no choice but to leave your current job at age 57, it's a good idea to think ahead about what you might do if you can't afford to retire.

One possibility is to continue working full-time with a different employer or even launch an entirely new career. Either option can be challenge when you're in your 50s, but both are doable. This Money Magazine special report lists the best jobs for people over 50. There also are specific tips to boost your odds of landing those jobs.

On the other hand, if your nest egg and other resources will come close to providing the income you'll require in retirement, you may need only a small paycheck to bridge the gap.

In that case, you may want to consider part-time or occasional work. You can get a sense of what types of part-time and temporary jobs are available to retirees today, as well as how much they pay and what sorts of benefits they provide, by checking out a recent feature on working in retirement I wrote on for Money's November "Retire Rich" cover package.

Third, keep monitoring your progress. A lot can change in the decade or so you have until you plan to retire. Indeed, if you think of all that's happened just in the past year alone in the housing, credit and stock markets, it's clear that things can change dramatically over even far shorter periods.

So regardless of what the reality check you perform now tells you, you'll want to review your status at least every couple of years to make sure you're still advancing toward your goal.

If you are, that's great. Stay the course. If you're not, you may need to think seriously about upping the amount you save (whether that means maxing out those Roths or, if you're already doing that, also saving in taxable accounts) or perhaps tweaking your investment strategy or doing both. (Again, though, beware of making radical changes in your investment plan.)

As you get within five or so years of your planned retirement date, you'll want to begin seriously examining how much income you can count on from different sources.

If you qualify for a traditional check-a-month pension from your employer, your HR department should be able to give you details on how much you'll collect.

And to get an idea of how much annual income you might be able to draw from your retirement nest egg without running through your savings too soon, you can run several scenarios with different withdrawal rates and investing strategies on the Retirement Income Calculator at the T. Rowe Price site.

Of course, re-assessing your investing strategy and taking the three steps I've outlined here can't guarantee that you'll come away with a "warm and fuzzy" feeling about your early retirement prospects.

But doing so will give you a realistic sense of where you stand today and, more important, let you know what you must do during the remainder of your career to assure yourself a comfortable and secure retirement, whenever you wind up taking it.