Planning to retire? Think again.

A survey in September by Bankrate, Inc. (bankrate.com), found

• 31% of respondents still expect to retire as planned;
• 20% expect to retire one to five years later;
• 13% expect to retire six to 10 years later;
• 7% expect to retire more than 10 years; and
• 18% said they will never be able to retire.

We used to take it for granted that at retirement age, our mortgages would be paid off and home value would serve as another source of income. But today, 43% of households age 65-74 have housing debt.

Investors followed the advice of portfolio managers to diversify their investments to reduce risk and to assure a comfortable and maybe even an “early” retirement. What has happened to the idea of diversifying portfolios? What has been the experience over the past 10 years? And what are lessons learned?

The idea of diversification is that if you invest in a variety of stocks or, more importantly, an index of stocks - say the Standard & Poor’s 500 stocks or mutual funds - an international stock fund and some bonds or bond funds and some real estate investment trusts, you will minimize the risk of market declines. The advice has been to invest for the long term, don’t try to pick individual stock “winners”, don’t react to short-term market swings and invest on a steady basis to overall smooth the peaks and valleys of the markets.

Did diversification work in 2008 when the stock market, as measured by the S & P 500 stock index, fell 37%? Surprisingly, mutual funds in general, international stocks, real estate investment trusts, high-yield bonds and commodities all declined in value by over 10%. For the past 10-year period ending September 30 of this year, stocks as measured by the S & P 500 index declined about .2% while bonds gained 6%.

Despite this startling information, another recent study found

• 43% of workers in the 56-65 age bracket had 70% or more of their 401(k) funds in equities; and
• 22% of older workers had 90% or more.

It is no wonder many people are delaying their retirement.

We can learn lessons from the recent market problems:

• First, use a rule of thumb that some investment managers suggest, rebalance your portfolio annually using your age as a guide. If you are 60 years old, 60% of your investments should be in fixed-income investments.
• Diversify your common stock portfolio. The stock market has recovered close to 50% since the lows and if you are investing on an ongoing basis, your new investments, as well as your former investments, will have appreciated considerably.
• Plan for your retirement based on what you think is necessary to replace your current income. Replacement ratios can vary considerably, but some suggest 80%, especially if you will continue to have mortgage payments.
• Social Security is estimated by its board of trustees to provide approximately 33% of the amount needed for retirement. Determine how much savings and investment you must have to provide the additional two-thirds.
• Couples should consider maximizing their combined social security benefits. There are sizable differences in amounts based on your age when filing. Research is suggesting a “62/70” strategy, where the lower earning spouse files at age 62 and the higher earning spouse waiting until age 70.

There is no single best strategy for recovering your investment to retire, but a set of strategies. Yes, working longer will help. It provides more time for your investments to grow, to increase your savings, potentially delays social security benefits and shortens the period that your savings have to support you.

One mutual fund management company suggests that if a person works until age 65, annual income from investments would be 12% greater than if retirement was started at age 62. If that same person saves 25% of income for these three years, the income would be 28% greater.

What lessons did you learn? What is your investment strategy? Do you have a plan for retirement? Will you be retiring sooner? Or later?

David Mielke is dean of Eastern Michigan University’s College of Business and a leader of SPARK East, a start-up business incubator in downtown Ypsilanti. He can be reached at dmielke@emich.edu.