Retirement rules of thumb don't always apply

— -- You may have celebrated the new year in 2000 more worried about whether your computer would work than whether you'd have enough for retirement. After all, you'd been saving diligently, and returns from stocks and bonds were spectacular.

The upcoming new year may find you far less confident than you were going into 2000. Stock returns have been wretched. You may be able to save less, either because you're squeezed by the cost of living, or because you've had to take a lower-paying job.

How much do you need to retire? Plenty. But before you panic, make a few calculations to see where you stand. You might be better off than you think — and if you're not, you can plan for that.

Your first calculation is figuring out how much you'll need. Financial planners often say you should plan on spending 75% to 80% of your current after-tax salary in retirement. After all, you won't be throwing money into retirement accounts anymore, and you won't be spending money on work expenses, such as commuting.

But many retirees find that they spend as much in retirement as they did before — if not more. "It's the dumbest rule of thumb I've ever heard," says Harold Evensky, a Coral Gables, Fla., financial planner. "The one thing that changes dramatically when you retire is the amount of time you have on your hands, and time costs money."

Those who want to travel, for example, can spend more on the road than they could while they were working, and those who want to golf can do it more frequently. Unless you'll pay off your mortgage by the time you retire, you should probably figure on living off the same amount in retirement as you do now — at least for the first few years.

Let's say you decide you need $5,000 a month in retirement, or $60,000 a year. First, count up any income you may get from other sources, such as Social Security or pensions. You can get an estimate of your Social Security benefit at www.socialsecurity.gov. We'll assume you get the average Social Security benefit — $1,200 — and no pension. You'll need to make up the $3,800 monthly shortfall — $45,600 a year — from your savings.

As a rule of thumb, you can start with an initial withdrawal of 4% to 5% with relatively little fear of running out of money in 30 years. (Half of all 65-year-olds will live another 18.6 years, according to the Centers for Disease Control and Prevention. Half will live longer.)

Why such a low withdrawal rate? Two reasons. First, taking withdrawals means you'll reduce your gains and increase your losses. If you earn 7% in one year and withdraw 5%, your account will grow just 2%. If you lose 7% one year and withdraw 5%, your account will shrink by 12%.

Secondly, the calculation assumes you'll need to adjust your withdrawals for inflation. If inflation averages 3% a year, $3,800 will have the buying power of $2,130 in 20 years. That's a 44% decrease in purchasing power.

But that's another rule of thumb that many disagree with. "Portfolios usually have a mix of safe stuff and risky stuff, and safe stuff is paying the least it's ever paid," says Barry Glassman, a McLean, Va., financial planner. "You either need to take more risk, live on less, or accumulate more to start with."

Your biggest enemy in building a retirement portfolio might be yourself. The wild swings in the stock market and dire forecasts for the economy may have you spooked. Trying to jump in and out of the stock market to avoid losses and catch rallies is usually a mug's game. "There's nothing anyone can do just by looking backwards," Evensky says.

To get your portfolio back in gear, try these steps:

•Diversify. The closer you get to retirement, the more losses hurt your portfolio. You won't have the time to get back even. If you lose 20% of your portfolio, for example, you'll need to earn 25% to get back to where you were. A fairly conservative portfolio for someone approaching retirement, for example, might consist of 50% stocks, 25% bonds and 25% bank CDs.

You can diversify further by putting small amounts into funds that invest in commodities, such as wheat, oil and gold. Real estate investment trusts offer exposure to another type of investment that doesn't move in lockstep with stocks.

Just how you divide your portfolio among different types of investments also depends on your tolerance for risk. Karthik Krishnan, a 52-year-old information technology specialist in South River, N.J., has most of his retirement savings in stocks. "It's just in my genes," he says. "I'm an optimist."

•Rebalance. At least once a year, look at your winners and losers. If you have decided stocks should be 50% of your portfolio, and they are now 40%, you need to move some of your money from bonds and money funds to get things back into balance. In effect, you're selling high and buying low.

But don't rebalance too frequently: You could rack up considerable tax liabilities and commission costs. Typically, you should rebalance the mix of stocks and bonds when they are 10 percentage points out of whack.

•Save more. It's not easy, but it's the one sure-fire way to boost your retirement savings. If your company matches your 401(k) plan, you're leaving money on the table by not contributing at least the percentage that's matched. But don't stop there. Krishnan saves 30% of his salary. "I'm pretty aggressive that way," he says. "I just keep socking it away in my 401(k) plan."