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This post is part of the Money Matters for All Ages project. The complete guide can be found at My Two Dollars.

You’re in your 50’s and all of your friends are starting to talk about their plans to take an early retirement and moving to the beach house in Florida they always dreamed about. You do the math and choke when you realize that if you want to retire at 65, you will need $1 million to produce a $40,000 income for the 25 years.

You’re not alone. According to The Motley Fool:

• 74% of baby boomers say they’re somewhat or very prepared financially for retirement. But just 8% have completed 10 basic steps for retirement preparation.
• Among older Americans, 90% are planning to rely primarily on Social Security for their retirement income, but Social Security supplied just 39% of retirement income for people 65 or older in 2001.
• About 90% of Americans say it’s somewhat or very likely that they’ll meet their retirement goals, but 60% were surprised to learn that $1 million in savings will safely provide only about $40,000 in annual retirement income.

What Can You Do?

The obvious choice is to delay retirement and work as long as you can. After that, you can still work part-time to supplement your income to reduce the amount of money you need to withdraw from your retirement accounts. That will keep as much money as possible in investments, which will continue to compound over your 20 to 30 years of retirement.

The federal government is well aware of the under-preparedness of Americans and offers people 50 and over the option to contribute more money to their retirement plans.

• 401k: In 2008, $25,500 pre-tax dollars can be contributed to your 401k a year if you are 50 or over, versus the standard $15,500 maximum 401k contribution.
• IRA: In 2008, $6,000 can be contributed to your Traditional or Roth IRA if you are 50 or over, versus the standard $5,000 maximum IRA contribution.

You can’t withdraw funds from your retirement plan without a major tax penalty until you are 59 ½ years old, and you might plan to work a few extra years longer beyond that age to keep your investments working to the max. Therefore, you’re safe to go heavy on a diversified stock portfolio.

This may seem contradictory to what most personal finance advisors advise, which typically instruct those nearing retirement to go heavier on fixed-income investments that are less risky. Typically the recommendation is to subtract your age from 110, and that will give you the amount you should devote to stocks. 110 – 50 = 50% allocation to stocks.

But the fact is if you have 10 years of investing ahead of you, stocks will safely give you the best returns. The Motley Fool’s rules for asset allocation are as follows:

1. Any money you need in the next year should be in cash. In other words, an interest-bearing money market or savings account.
2. Any money you need in the next two to five years should be in a safe fixed-income investment, such as certificates of deposit or bonds.
3. Any money you don’t need in the next five to 10 years is a candidate for the stock market, which will produce 10% annual returns over 10 years.

Lastly, you may also want to consider downsizing and reducing your expenses as much as possible. This will mean less money needed at retirement and more money you can contribute now towards your tax sheltered retirement plans.

Millionaire Money Habit: Funding your retirement for 25 or more years can be very costly and requires a sound plan. While $1 million will produce $40,000 in annual income for 25 years, that’s in today’s dollars. A 35-year-old today would need $3.25 million for the same relative income when inflation is taken into consideration. If you want to enjoy a comfortable retirement, don’t put retirement planning off another day.

Be sure to read the entire Money Matters for All Ages series. The Complete Guide can be found at My Dollar Plan.