Relax, would you? Really. Just relax. Your retirement will be OK.
I know you've heard all the bad news about America's pitiful savings rate and paltry 401(k) balances. And I know it can be confusing, having first to choose from among all the retirement plans, and then having to choose the investments that go into those plans.
But relax -- the Fool is here to help. Basic retirement planning is actually pretty simple. And I'll show you how simple in this very article. I promise to tell you everything you need to know to get on the right path, as long as you promise to take action and put your plan in motion.
Fair deal? Excellent. Then let's get started.
Step 1: Accept your boss' help
If you have a retirement plan at work, sign up. The money will go directly from your paycheck to the account before you can get your hands on it. All contributions will lower your taxable income -- in other words, they will lower your tax bill. Plus, your employer might pay you to participate, in the form of matching your contributions; you put in a dollar, the employer puts in 50 cents -- or whatever formula your employer uses.
How much should you contribute to the plan? At least enough so that you can take full advantage of an employer match. After that, you might consider moving on to the next step.
Step 2: Contribute to a Roth IRA
With a Roth IRA, you're giving up a tax-deduction today (which is what you get with contributions to a traditional IRA or employer plan) in order to never have to pay taxes on the earnings or withdrawals (as long as you play by the rules). Sound good? It is -- it's one of the best deals going, actually, as long as you're eligible. (Single taxpayers must earn less than $110,000, and married folks must earn less than $160,000.) You can read this article for more on why I think the Roth rules, and visit our IRA Center to learn about opening an account.
Step 3: Choose a target retirement fund
Every month in my Rule Your Retirement newsletter, I have the pleasure of interviewing some of the best and brightest of the investing/financial planning world. For a recent issue, I had a conversation with Newsweek columnist Jane Bryant Quinn, author of the excellent book Smart and Simple Financial Strategies for Busy People. Here's what she had to say about the newest development on Wall Street, target retirement funds:
I think that they are the first really important product for individuals to come along since index funds. The reason I like them is they are basically one-decision funds. If you go to professional advisors, what will they tell you? They will tell you to allocate your assets, and they are going to give you more stocks when you are younger. As you reach middle age, they are going to modify that a little, and when you retire, you will have a more moderate portfolio. And then when you are 80, it will be mostly an income fund. They [advisors] will charge a hefty fee to do this for you.
The target retirement fund does it for you automatically. It is a wonderful, professional product that gives you appropriate asset allocation for your age, and it rebalances, which folks never do with their own investments. Even if they understand it, they never do it because it is hard.
I'll second all those sentiments, and I'll also emphasize the "allocate your assets" and "rebalances" parts. Unless you're a master stock picker, you need a broadly diversified portfolio, and you need to rebalance regularly -- selling what has done well; buying what might be ready for its turn. Don't you wish you'd rebalanced in 1999?
Target retirement funds do it all for you. Now, many people -- myself included -- will argue that doing the allocation yourself can lead to better returns. But generally, these investments are a great place to start. Nowadays, they're offered in many employer plans and by most of the low-cost mutual fund companies, including Vanguard, T. Rowe Price
Step 4: Learn more
Once you have implemented this plan, take the time to learn more. Learn about asset allocation. Learn about investing in individual stocks. Learn about cutting your taxes. Even learn about tools that can help you calculate whether your retirement plan is on track. (My Rule Your Retirement service can help you do all of those things -- take a 30-day free trial and see for yourself.) But don't wait until you know everything to do something. Start saving now -- and if you're already saving, find ways to save more. There's no better recipe for a solid retirement plan.
Robert Brokamp wrote an article about taking control of your finances for a June 2001 issue of Newsweek. The cover had a picture of Vermont's Sen. Jim Jeffords, who defected from the Republican Party. Doesn't that seem like a lifetime ago? The Fool has a disclosure policy.