Jean Chatzky: How to save wisely

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Americans struggle when it comes to saving for retirement. The most recent data from the Employee Benefits Research Institute show that more than one-third of workers have saved less than $1,000. And those who are able to pull money together, no matter what the amount, are hesitant to invest it. According to Bankrate research, nearly 75 percent of consumers choose safe, but low-yielding, liquid accounts over the stock market.

That’s a problem, says Sophia Bera, a Minnesota-based certified financial planner. “If you’re too conservatively invested in retirement accounts, that makes it hard for your assets to outpace inflation,” she says. “If inflation is 3 percent a year, and you’re only earning 2 percent, you’re actually losing money.”

The solution? Create a mix of investments, called an asset allocation, that keeps pace with inflation, takes an appropriate amount of risk and works for you as you age.

Here’s how:

Choose an appropriate account. If your employer offers a 401(k), and contributes matching dollars, then there’s no discussion here — that is where you start. “If you have that, you don’t want to leave free money on the table, so you want to maximize that first and foremost,” Bera says.

Once you’ve contributed enough to grab that match, often 50 percent on the first 6 percent of your salary that you contribute, you can keep going until you hit the maximum contribution for the year. If you don’t like your investment choices, you can look at other vehicles, like an IRA, or, if you’re eligible, a Roth. Currently, you can contribute up to $5,500 to an IRA if you’re under 50; $6,500 if you’re older. To be eligible to make that full contribution to a Roth, you must earn less than $181,000 if you’re married filing jointly, or $114,000 if you’re single.

A Roth is a great pairing with a 401(k) if you’re eligible, Bera says, because you’ll cover two bases on taxes: The 401(k) gives you a deduction on contributions in the year you make them. A Roth comes with no immediate tax deduction, but you can pull out money in retirement tax-free. (Note: These days some employers offer Roth 401(k) options, as well, which can serve the same purpose.)

Run your retirement numbers. You need to get a handle on how much money you’ll need. “The most powerful tool that people have is really doing some long-term projections,” says Texas-based financial planner Jean Keener. “If you can figure out a baseline projection of how much you need to be saving for retirement, that’s the one thing you should be doing as early in your financial life as possible.” To do that, play around with a few calculators, like Bankrate’s retirement income calculator. I also like the Ballpark E$timate from Choose to Save and the retirement income calculator from T. Rowe Price.

Set an asset allocation. As I mentioned earlier, this is the mix of investments within your account. You want stocks, fixed income or bonds and cash. The amount of each depends on your age and risk tolerance. Generally, when you’re young, you’ll take more risk. As you approach retirement age, you’ll shift toward less. If you don’t want to make these decisions, you can choose a target-date retirement fund, which allows you to select the year in which you plan to retire. The fund will then invest your money accordingly.

Rebalance. The aforementioned target-date retirement fund will do this for you. But if you’ve decided to go at it alone, you need to periodically — Bera recommends once a year — check your investments to make sure they’re still on track. If the equity markets do well (as they have lately), you may find that you have too much exposure to stocks. You’ll need to sell some of those winners and put the profits back into categories that are a bit slower-going to bring things back in line.