Modeling the future

Many financial firms use Monte Carlo simulations in which they look at thousands of possible patterns of market performance and evaluate the probabilities of different investment results.

Using that type of analysis, Spiegelman of Charles Schwab advises that people within three to five years of retirement should have no more than 60% of their assets in stocks and preferably closer to 40%. By Schwab's math, stock exposure at just 20% of the portfolio can work, too, if you're willing to start off withdrawals at 3.8%, not 4%, of your nest egg.

In all three cases, if you maintain that portfolio mix through retirement, Schwab has calculated that you've got a 90% probability of your money lasting 30 years.

But Spiegelman cautions that the guidelines about how much you can pull out in retirement are all ballpark figures "based on a best guess using reasonable assumptions." He says people in retirement should stay flexible about adjusting their withdrawals to actual market conditions.

Christine Fahlund, a senior financial planner at T. Rowe Price Group, concurs that "the sweet spot" for stock exposure is usually between 40% and 60% as people approach and enter retirement. At 10% or less in stocks, "you don't have the upside growth potential," she says. And if you have 80% or more in stocks, "you have so much volatility that to maintain (a high) likelihood of not running out of money, you can't withdraw as much."

Other answers

Some other financial firms and advisers come up with very different suggested portfolios for cash-strapped pre-retirees, by approaching the issues of portfolio risk from a different angle.

Some professional investors design portfolios so that raising and lowering stock exposure isn't the primary way to adjust risk and potential returns. For instance, in its target-date funds, Invesco aims to spread the risk fairly evenly among three asset types -- stocks, commodities and bonds -- because they tend to perform differently in different economic environments. It uses derivatives contracts to add more volatility and potential return to the relatively sedate fixed-income class.

Another school of thought is that investors who are behind the eight ball would be foolhardy to do anything but invest very conservatively.

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"Focusing on probability of success misleads people by ignoring the severity of failure," says Zvi Bodie, a finance professor at Boston University. He generally advises retirement savers to limit stock holdings and to rely heavily on Treasury inflation-protected securities, and Series I inflation-indexed savings bonds to lock in a minimum level of income that will keep up with rising consumer prices.

Advisor Software, a Lafayette, Calif.-based seller of financial-planning software for financial advisers, also emphasizes a safety-first approach. For a pre-retiree who is coming up short, the company might suggest a portfolio of as much as 85% to 90% in bonds -- with much of that in TIPS -- and only 10% to 15% in stocks, says company President Neal Ringquist. If you can't afford to lose what you've got now, "then it simply doesn't make sense to put these assets at risk," he says.