Q&A: Saving For Retirement

Dear Liz: What is the best way to protect my 401(k) now and in the future when I draw from it for retirement? What is the least risky place to "bank it"? I have a fear of a crashing stock market in the middle of my retirement years.

Answer: The bigger risk is that the stock market will crash early in your retirement years. Starting withdrawals from a shrunken pool can dramatically increase the odds of running short of money in your later years.

But first things first. Understand that it's not possible to keep your money safe and get it to grow at the same time. Keeping your money "safe" means accepting returns that are below (often well below) the level of inflation, which means steadily losing buying power.

Typically, the only money you want in "safe" investments is the money you expect to tap within a few years. In your working years, you should keep your emergency fund in a low-risk, easily accessible place such as an FDIC-insured bank account.

When you're ready to retire, you might want to have one to two years' worth of expenses in such an account, to insulate you somewhat from stock market swings.

If you want your money to grow, you'll need to have the majority of it in stocks. With stocks comes the risk of losing principal at times. Stocks fell by about half from their peaks in the 2008-09 crash, and by 90% during the Great Depression.

Scary, right? Yet over time, accepting that risk pays off. In every 30-year period since 1928, which includes the Great Depression years, stocks as measured by the Standard & Poor's 500 eventually grew enough to offset losses and create annual returns that averaged out to at least 8%.

As you get closer to retirement, you'll probably want to add more bonds to your investment mix to cushion your retirement fund from violent market swings. Your 401(k) plan probably has an option that will do that automatically for you, known as a target date retirement fund. Your plan also should have plenty of information about what you need to know as an investor. If you want more personalized advice, you can hire a fee-only planner who charges by the hour to review your financial situation and offer recommendations.

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