After years of neglecting their retirement savings, Americans are experiencing a case of "savings panic." Many middle-aged investors, concerned their golden years won't be so golden, are throwing money into mutual funds before developing an overall game plan. Among older Americans, the fear of running out of money has led many to conclude they must preserve capital at all costs.
 

Our advice for retirement-oriented investors: don't panic. The best investment decisions are unemotional ones, and it is hard to be unemotional in a state of panic. Planning for retirement should be done in a factual, step-by-step way.
 

First, estimate how much annual income you need in retirement. Second, estimate how much you need to have saved to generate that income. Third, project how much your current savings will be worth by the time you retire. Fourth, determine how much more you need to save each year to reach your retirement goal. Finally, set an asset allocation for your portfolio that reflects your return requirement and risk tolerance.
 

The first four steps are outlined in the our Retirement Optimizer. If the worksheet determines you must save an unrealistic amount each year, you have three options: reduce your required retirement income, delay your retirement, or invest more aggressively.
 

The worksheet assumes your investments earn 8% before retirement and 7% after retirement. With a mostly stock portfolio, you should be able to do better. But don't count on the 20%-plus returns of recent years continuing. And don't forget that stocks often decline -- sometimes by a lot.
 

Your portfolio should be tailored to your individual return requirements, risk tolerance, liquidity needs, time horizon, and tax situation. Our Asset Optimizer should help you design an investment strategy and set an asset allocation. Answer the questions as accurately as you can, then use the portfolio recommendations as a rough guide.
 

Remember, though, that no preformatted worksheet should do the entire job of determining your asset allocation. It is crucial that you feel comfortable with your portfolio. Otherwise, you may make knee-jerk decisions when market conditions change; unless you have confidence that the allocation you set was the right one for the long haul, you may be tempted to shift gears simply because the market is rising or falling.
 

In general, retirement investing can be divided into the pre-retirement accumulation stage and the retirement / drawdown stage.
 

Accumulation stage. In the buildup to retirement, your primary objective should be growth. The Forecasts Growth Portfolio is designed for long-term investors seeking growth. If you prefer, substitute individual stocks for the U.S. stock funds in the portfolio. But do not neglect foreign stocks, and do not concentrate all your domestic holdings into the same types of funds or stocks. By spreading your portfolio among different asset classes, you can lower overall volatility without lowering expected return.
 

Retirement/drawdown stage. Many investors shift their portfolios into bonds once they reach retirement. That is a mistake. As the table on the right shows, the average life expectancy of a 65-year-old is 20 years. Retirees that invest strictly for income and ignore growth will see their purchasing power eroded by inflation.
 

The Conservative Portfolio represents a reasonable allocation for a retiree under 75. Based on historical asset-class performance, the Conservative Portfolio has an expected return of 14% per year. If that return is higher than you need and you are uncomfortable holding roughly 75% of your portfolio in stocks, shift more of the portfolio into bonds.

However, do not shift into bonds simply because you need more income. Many retirees have been taught that dipping into capital is foolhardy, so they limit themselves to high-yield securities. But spending some capital is better than holding a portfolio with too little growth potential.
 

How much capital can you afford to spend? The answer depends on your life expectancy and investment returns, as the table below shows. For example, an investor earning 6% returns could withdraw 8% of his or her portfolio for 24 years.