AGES 25 TO 35: START SAVING NOW
You're in the accumulation phase. What matters most is the amount you can save—and developing good money-management habits that will pay off in the future.
Aim to set aside 20% of your income. First, focus on retiring debt, especially high-interest-rate credit cards. Ask your lender to cut rates on your cards to 12%, the industry average. In the current environment, lenders are more willing to listen.
Invest in equities, especially now, when prices are low. With your long horizon, you'll benefit from the stock market's long-term performance.
If you fear a layoff, build a one-year emergency fund; otherwise, make it a six-month supply of cash. Set up other savings accounts for retirement and perhaps for a first home and your children's education.
If possible, max out in your retirement accounts. The recent financial turmoil, many advisers say, is a once-in-a-lifetime buying opportunity. The most you can contribute to a 401(k) plan and similar retirement accounts in 2009 is $16,500 in pretax dollars.
For your IRA, consider a target-date fund, which adjusts your asset mix as your retirement date approaches. And maybe convert a traditional IRA to a Roth IRA, which will switch you from tax-deferred to tax-free savings. You'll pay less in taxes over the life of the investment.
AGES 35 TO 55: TURNING CONSERVATIVE
You're in transition: saving for retirement and college costs but beginning to shift to preserving assets.
In the recession, be sure to have a cash cushion—in money-market funds or short-term certificates of deposit—to cover at least one year of living expenses. To boost cash, consider trimming your contributions to retirement accounts. If you are a homeowner, another option for raising cash is a home-equity line of credit, which can still be had for around 5.5%. The interest is tax-deductible. For yields on cash instruments, check out Bankrate.com (RATE).
Tuition bills on the horizon? If you live in one of 35 states that offer tax deductions on 529 plans, open one up. Compare plans at Savingforcollege.com. (RATE)
Evaluate your retirement plan against your goals using the "Ballpark E$timate" retirement calculator at Choosetosave.org.
Keep your investments geared toward growth—you still have a long investment horizon ahead—but start building an income portfolio with blue-chip stocks, many of which yield 3.1% or more. If you are in a high tax bracket, acquire some municipal bonds with outsize yields. If you can stomach risk, consider allocating 5% to high-yield bonds, which typically yield 8% or more. And begin to diversify into noncorrelated assets, such as market-neutral funds, managed futures, and even commodities, to protect your stock holdings.
AGES 55 TO 75: PLAN YOUR WITHDRAWALS
You're going from peak earning years to retirement, so create a withdrawal plan. As you begin to rely on your investments to meet living expenses, remember that your biggest enemy may be inflation—losing purchasing power. To test-drive your income strategy, try T. Rowe Price's (TROW) retirement income calculator at troweprice.com.
Dial back the risk and adjust your portfolio to generate more income. Reduce exposure to small and microcap stocks and such volatile areas as emerging markets. But don't shift predominantly to fixed income if that means cashing out stocks that could recover over the next few years.
The market's swoon provides opportunities for estate planning, such as transferring assets—including family partnerships—to heirs at low values. And if you meet the income limits, convert taxable retirement accounts to a Roth IRA to give your heirs a lifetime of tax-free distributions.
Watch your mandatory distributions carefully. When you hit age 70 1/2, you must start taking money out of your retirement plans. That's painful right now, because you may have to sell stocks, bonds, or other assets at depressed prices. (New legislation, however, will likely permit retirees to delay distributions in 2009.) Required distributions usually start at 4%, so to avoid being thrown into a higher tax bracket when the time comes, consider taking smaller withdrawals when you're younger.
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