retirement

3 ways to build a secure retirement plan

Hope is not an investment strategy
By Jean Chatzky

If you don't want to open your 401(k) statement, you're not alone. But not paying attention to your retirement plan now will come back to haunt you later. Take these three steps to build a solid plan to ensure security in retirement.

1. Determine your contribution amount

Linda Gadkowski, a fee-only Certified Financial Planner with Beacon Financial Planning in Cape Cod, Mass., says the amount you need to contribute to your 401(k) or 403(b) plan depends on your age.

"If you're in your 20s, it's 10 percent (of income); if you're in your 30s, 15 percent. If you're 40-plus, 20 percent," she says. Workers in their 40s who haven't saved before should save the maximum, which is now $16,500 per year. For workers 50 and older, the limit is $22,000.

If your company matches, you can include that in your calculations, says Gadkowski. For example, if you're in your 20s and your employer matches 3 percent, then you should be saving 7 percent, for a total of 10 percent. "At least get the match," she says.

The most common reason people don't invest in their 401(k)s? "Their withholding is incorrect," says Gadkowski. "You get the job and you're not sure what to put down for withholding, so you put down zero and you never change it."

Instead, you should adjust your withholding to accurately reflect your tax liability, then put the extra money that would end up in your paycheck in your 401(k) instead. "Don't get the money as a tax refund and blow it at Disneyland," Gadkowski says.

2. Choose appropriate funds

Confused by all the offerings in your 401(k)? You're not alone.

"The tendency is to offer more than the average participant can reasonably choose from," says Nevin Adams, editor in chief of Plansponsor.com, which advises benefits and retirement decision makers. In its most recent annual survey of defined contribution plans, which included 5,600 plan sponsors of all different sizes, the median number of options was 17.

Adams says that the offerings are frequently skewed in favor of equities. "It's very typical for an employer to put in, for example, 12 stock funds and one bond fund, because how many flavors of bonds are there?"

The problem is, people will pick 10 stock funds and one bond fund. "In other words, they do the math based on the funds they have without understanding them," says Adams.

"They see the stock funds as different options, and not the similarities."

Rather than investing a bit in each fund, plan participants should split the offerings into different asset classes -- for example, stock funds, money market funds and bond funds. "Then you can focus on more manageable subsets," he says.

A general rule of thumb is to subtract your age from 100 and invest that much in stock funds. For example, if you're in your 20s, about 80 percent of your 401(k) assets should be in equities and 20 percent in fixed income. When you're in your 30s, it should be about 70 percent stocks and 30 percent bonds, etc.

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