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Got time to spare? Don't waste it.
If you're in your 20s or 30s (or even 40s), time is on your side.
April 27, 2005: 11:27 AM EDT
By Penelope Wang, Laura Lallos & Walecia Konrad, Money Magazine
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NEW YORK (Money Magazine) - It's a great time to be young. Not only are your savings helping to make up for losses, but you also have enough time to bounce back, especially because what you've saved so far is only a fraction of what you will save.

Say someone starts saving at 25, and at age 30 he experiences a 20 percent decline in his portfolio. Since he will continue to save money for the next 35 years and that money will compound, that 20 percent drop, while steep in the near-term, will only amount to a very small drop in his total portfolio by the time he is 65.

"Since the 30-year-old hasn't made all his money yet, he can't lose it," says Martin Leibowitz, chief investment officer at TIAA-CREF.

Even for 40-year-olds, who've saved nearly 50 percent of what they'll have at age 65, that 20 percent hit would produce only a 10 percent shortfall -- damage that can be repaired with extra savings and smart strategies.

Reaching your retirement goal hinges on how much you save in the years to come, and that rate will have to be vigorous. Here's a plan for getting where you want to be.

Recalculate your needs Of course, there is no fool-proof method for figuring out exactly what you'll need, and no expert can predict what the market will do in the next 20 years. But simply assessing where you stand, creating realistic targets and devising strategies may improve your odds for success.

A study from the Center for Retirement Research at Boston College found that households in which someone thought "a lot" about retirement had twice as much wealth heading into the golden years as households in which there was little or no planning.

Making such calculations in recent years, you might have overstated just how much your savings would grow. Now, are you ready for returns on stocks of maybe 7 percent or 8 percent? Use our Retirement Planner and Savings Calculator to gauge how much you might need, and your chances of getting there.

Get help at work At this point, you may be faced with a harsh reality: You need to save more.

Fortunately, Congress has given you some help. Employees now can put as much as $12,000 in their 401(k), 403(b) or 457 plans, up from $11,000 in 2002. That cap increases by $1,000 each year until 2006 and is adjusted for inflation thereafter. Self-employed workers can put away significantly more as well.

These higher caps can make a big difference. A 45-year-old who takes advantage of the higher limits every year will end up with almost $200,000 more (before taxes) at age 65, assuming an 8 percent average annual return, according to calculations by T. Rowe Price.

Note that the new limits are voluntary for employers. If your company decides against raising them in your plan, you're stuck. Fortunately, according to benefits consulting firm Watson Wyatt, early indications were that most companies will start using the new limits.

Look to IRAs Once you've put away as much as you can on the job, see if you can take advantage of the new IRA rules.

Contribution limits to both traditional and Roth IRAs jumped to $3,000 in 2002, will rise to $4,000 in 2005 and to $5,000 in 2008. Just as with 401(k)s, this increase can make a big difference. After 20 years, an IRA investor can now rack up $248,800 instead of $126,000, assuming an 8 percent return.

(Deductible IRAs are still subject to restrictions -- employees with access to a retirement plan at work may not deduct any part of their contribution if they are single and making $50,000 or more, or married filing jointly making a combined $70,000 or more. To fully fund a Roth, couples must have adjusted gross income of less than $150,000, singles less than $95,000. Couples can partially fund a Roth if their income is at least $150,000 but less than $160,000; while for singles the range is at least $95,000 but less than $110,000.)

Save more after tax As fabulous as the new contribution limits are, the reality is that putting every possible penny into tax-deferred retirement plans will not be enough. According to projections from Fidelity, mid-career workers can expect 401(k)s to contribute only 55 percent of the income they'll need to retire.

The message is clear: To retire well, you need additional savings. Scott Lummer, pension investment consultant and former Ibbotson strategist, advises squirreling away 15 percent to 20 percent of your gross income toward retirement during these accumulation years. That may seem like a tall order, but it's a lot easier than the 25 percent or more that might be required later.

Invest for growth From your 20s through your 40s, investing for growth is crucial. For many people, an appropriate asset allocation would be 80 percent stocks and 20 percent bonds, with most of the stock money going into a broad index fund and the rest into small-company and international stocks.

Finally, keep an eye out for tax efficiencies in the money you save on your own. Index funds, low-turnover mutual funds and, for what little bond exposure you may have, muni bonds and muni bond funds always give a boost to your taxable retirement savings.

(This article, originally published in the April 2002 issue of Money Magazine, has been updated.)  Top of page