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Imagine this scenario: You're only five or 10 years from when you hope to retire -- but your portfolio looks like it needs another lifetime to bulk up.

What do you do?

Many people, of course, don't need to imagine. It's their reality -- the result of watching their investments get clobbered in the two bear markets of the past decade. And many others will face this sad state in the years ahead.

If you're one of those people, the first step is to take a deep breath and remind yourself that you're far from alone. Misery does love company.

Next, consider two messages that financial pros say people need to hear before any more time elapses:

  • If your nest egg is far smaller than you will need in order to comfortably leave the work force, investment returns alone are unlikely to bail you out. You need to get serious about trimming your spending to save more money, or resign yourself to working more years.
  • When your nest egg is small and time is short, you can make things worse for yourself by being either too conservative or too aggressive.

Many pre-retirees hew to one extreme or the other. When Fidelity Investments recently studied participants in the 401k plans it oversees, it found that 28% of participants age 55 or older either had no money in stocks or 100% of their 401k balances in stocks. (The no-stock folks were slightly more numerous than the all-stock crowd, 15% to 13%.)

Here's a closer look at the challenges for pre-retirees and their options.

No time for compounding

One way to estimate the lump sum you'll need for retirement is to rough out how much money you'll need to pull from your portfolio annually when you retire -- and multiply by the painfully large number of 25. That's based on the rule of thumb that you can probably withdraw 4% of your account value in year one and adjust that by inflation each year. (That assumes you're investing in a mix of stocks and bonds and want your money to last for 30 years.)

If you're nowhere near that target now, making changes to your asset mix -- typically by adding stocks -- isn't as powerful a tool as it was when you were younger. It's simple math: There aren't many years for compounding to do its magic before you start pulling money out.

Moreover, while stocks are typically the driving force in a long-term portfolio, due to their higher average returns over time, they are also a wild card. Pre-retirees face a catch-up conundrum: They could sure use the payoff from being heavily invested in stocks when the market is in a strong upswing. But they can't afford the risk of having their already skimpy nest eggs decimated shortly before or after they leave the work force.

Loading up on stocks "radically expands the range of outcomes you may experience," says Christopher Jones, the chief investment officer at Financial Engines, in Palo Alto, Calif., which provides advice and investment management to retirement-plan participants. And in the worst cases, "what was an uncomfortable situation can go to really uncomfortable."

Finding a balance

What that means for how you invest is this: If you have very little in stocks -- say, because you fled equities amid the financial crisis of 2008 -- you can boost your expected return by adding some stocks to the mix. And by doing so, advisers say you'll probably be able to increase the cash you can safely withdraw. Even 20% of assets in stocks may make a difference.

Just don't go so far that you are setting yourself up to bail out the next time the market plunges. While taking more investment risk might make sense mathematically, "you don't magically become more risk-tolerant just because you have to," says Rande Spiegelman, the vice president of financial planning at Charles Schwab.

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But if you've already got a lot in stocks, increasing that bet further could backfire -- making your returns so unpredictable that it actually reduces the amount of money you can safely withdraw from your portfolio.

Particularly risky are big bets on individual securities, including your own company's shares. But about a quarter of 401k participants age 60 and older have more than 20% of their 401k money in employer stock, according to Financial Engines. These workers "mistake familiarity for safety," says Jones, who warns that most individual stocks "have two to three times the risk of a more broadly diversified equity portfolio."