Christine Fahlund received her Ph.D. in biochemistry from the University of Massachusetts and has worked in financial planning for more than 25 years. Her personal philosophy on investing is: "A well-diversified portfolio with significant exposure to equities is an important component of any retirement planning strategy. However, saving enough and not spending too much in retirement are also required. Both your investment strategy and your cash flow strategies must be tailored to your situation to successfully achieve the lifestyle you desire in retirement."

How Every Age Group Can Prepare for Retirement

By Lynn Novelli

Christine Fahlund is a senior financial planner in the financial planning services division of corporate marketing with T. Rowe Price, a financial services holding company offering investment advisory services as well as sponsored T. Rowe Price mutual funds and other investments. She is a frequent speaker to professional and community groups on retirement and estate planning issues and has been quoted in the Wall Street Journal, The New York Times, Fortune, Forbes, BusinessWeek and other national publications.

Portfolio recently sat down with Fahlund and discussed T. Rowe Price's views on preparing for retirement—who is ready, who is not, and what steps every age group should take for the future.

Portfolio How financially prepared are people for retirement?

Fahlund: The answer depends on the age group. The good news is that those in their 20s and 30s are getting the message that they will not be able to rely on Social Security or pension plans for retirement, and, therefore, they have to be saving on their own.

Those most likely to be shortchanged in lifestyle during retirement are individuals who are now in their mid-50s and 60s. During the early years of their careers, there was not a perceived need to personally save for retirement. They have only learned about the realities of the situation in the last five years.

Portfolio What challenges will this age group face when they are ready to retire?

Fahlund: This age group is experiencing a lot of unpleasant surprises that will affect their retirement. They expected to have Social Security income, but former Federal Reserve Chairman Alan Greenspan warned that Social Security is unreliable. They expected to have pensions, but many companies have eliminated pension plans. They are projected to have a longer life expectancy, which usually means they will incur serious medical expenses that will tap into their savings.

Many people in this demographic were looking forward to retiring at age 62 or 65 but were laid off before that and were unable find a new position at the same salary level. Their retirement plans are delayed and they will be working longer.

Portfolio How should younger workers prepare for retirement with the realities of disappearing pension plans and an unreliable Social Security over the next 20 years?

Fahlund: Get good financial advice, get it early and start saving. This will let your money compound for you. Continue to read and educate yourself about retirement, and periodically get professional advice.

As you approach retirement, zero in on what is most important to you. Once you get your values straight, it will change your perspective. You probably will need to spend less and save more, which may involve tightening up your pre-retirement lifestyle. If you can do this by the time you retire, you will have a comfortable balance between retirement spending and lifestyle.

Portfolio What about those individuals in their 40s and early 50s?

Fahlund: This is an interesting group. Hopefully, they are already preparing themselves for retirement. However, this is also the age when many people are paying their children's college tuition. They should weigh the benefits of saving for college versus saving for retirement in a way that will allow them to be financially independent of their children later in life.

This is also the age group that needs to contribute as much as possible to an employer-sponsored 401(k) plan as well as other vehicles for retirement savings.

Portfolio What percentage of one's salary should people earmark for retirement?

Fahlund: Generally, people should be saving 15 percent of their gross salary each year. This may seem high, but this goal can be achieved if you max out your 401(k) plan contributions and contribute to an IRA. People should take full advantage of their 401(k) by contributing enough to get the maximum employer match.

Individuals who save at this rate early in their careers should have enough funds at age 65 to replace at least 50 percent of their current salary, adjusted for inflation. T. Rowe Price recommends that retirement savings by age 40 should equal two times your annual salary, and by age 50 should equal three times your annual salary.

Portfolio In terms of retirement savings, are you seeing a trend toward a particular type of investment?

Fahlund: Lifecycle or target date funds that automatically readjust and reallocate investments every five to 10 years have accelerated like gangbusters. These funds are very attractive to people who don't understand equities and bonds and don't want to have to make their own adjustments.

Portfolio What role do REITs play in a retirement savings strategy?

Fahlund: REITs are an excellent choice for accumulation and diversification because they behave differently than stocks and bonds. When the stock market is down, REITs tend to go up or possibly not drop as much. Conversely, when stocks go up, REITs may go down or not rise as much. This is why investing in REITs for retirement can help hedge your portfolio against cycles in the stock market, bank and government-based investment tools, as well as the ups and downs of the economy.

Portfolio What are the advantages to investing through a REIT fund compared with choosing individual REITs?

Fahlund: Investing in a REIT fund is an easy way to add real estate to your retirement portfolio. Not only is someone else picking and managing, but a REIT fund also offers the advantages of further diversification within a real estate investment.

Portfolio What strategy do you recommend for keeping real estate investment in proportion in the total retirement portfolio over time?

Fahlund: You should have a periodic review of your portfolio with an expert who will help you rebalance your investments to reach that 5 percent to 10 percent level. Generally, one's investments are part of a financial planning strategy designed to achieve a certain goal, such as purchase more real estate or accumulate assets for income in retirement. Therefore, it's important to review where your allocation is every year or two.

Also, when market returns swing wildly, an investor's portfolio could really become out of balance as a result. In that case, having a professional review the situation and help the investor rebalance the overall portfolio to the desired asset allocation can be a valuable service.