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3-step retirement plan
Tales of the baby boomers' predicament got you scared? Here's how to tilt the odds in your favor.
July 18, 2003: 9:41 AM EDT
By Walter Updegrave, Money Magazine

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NEW YORK (CNN/Money) - I'm a freshman in college and have been reading articles about how baby boomers are not prepared for retirement. What kind of steps can I take now to secure my own financial future for retirement?

-- Joseph Barringer, Thomasville, Ga.

Hardly a week goes by, it seems, that I don't see some study or survey or analysis that shows that baby boomers like myself are woefully unprepared for retirement and headed for a grim existence on cat food and Old Milwaukee after we call it a career.

You can argue about how accurate these various studies and analyses are. I think they sometimes err by not taking into account that the next generation of retirees will live very different lives from previous ones.

Yes, the boomers will live longer than earlier generations and that will mean they'll need more money.

On the other hand, I think boomers won't view retirement as a time when you completely drop out of the work force and spend your Golden Years playing shuffleboard on Carnival cruises until the money runs out.

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Surveys show that boomers are more likely to work part-time in retirement, move in and out of the work force, or even start new businesses.

Indeed, "rehire" may be a better term than "retire" for many boomers.

In any case, to the extent they work, boomers can get by with a lower level of retirement savings than they otherwise would, which means that they may be better off than a lot of the pessimists believe.

That said, I do agree that, on average, my generation could be a lot better prepared for our final adventure, retirement. (For a look at baby boomers' retirement prospects and their vision of retirement, click here.)

Invest, young man!

But enough about the boomers. Let's talk about you and what you need to do to prepare for retirement.

There's no great secret about what it takes to create a successful retirement plan. Indeed, it's very intuitive. But just for the record, let me give you the Ask the Expert down-and-dirty three-point retirement planning guide.

1. Save early and often. In real estate investing, the mantra is location, location, location. In retirement planning, it's save, save, save!

Let's say, someone begins saving $500 a month at age 40 and earns an annualized 8 percent rate of return. At age 65, they would have about $457,000. If that same person started saving instead at age 30, they would have that $457,000 10 years earlier, at age 55. And even if they didn't add another cent over the next 10 years, their retirement fund would grow to just under $1 million.

Obviously this is a simplified example, but you get the idea. The sooner you get started and the more you save, the more the power of compounding can help your nest egg grow.

Similarly, the more you can make the saving automatic and painless via payroll deductions, the better off you'll be. And the more you can save in tax-advantaged accounts like 401(k)s and IRAs, the more money you'll have working for you.

2. Invest based on reality, not fantasy. Too many people think the key to retirement investing is being a "savvy" investor, "savvy" translating to "picking the best stocks or mutual funds or knowing when to get in or out of the market."

In the real world, however, no one knows in advance what the best funds will be in advance or when it's the right time to move from one asset class to another. Look at recent experience.

A better solution: Create a diversified portfolio that includes a variety of asset classes in proportions that make sense given your risk tolerance and time horizon. And then periodically rebalance your portfolio to bring it back to its original proportions. For tips on how to create that portfolio, click here.

3. Don't dip into your stash until retirement. This is where a lot of people go wrong. They build up a nice little balance in their 401(k) or IRA or taxable account, and then they find all sorts of reasons they need it. They need to buy a car or a house or plan a big splashy wedding or whatever. So they borrow against their account or they switch jobs and spend the money instead of rolling it over.

Now, I realize that there are situations where borrowing against a 401(k) may be a wise financial decision. And that there are times when times are so bad that one needs to dip into savings. But too many people see their various retirement stashes as the first place to go for money because retirement seems so far off into the future.

Believe me, retirement begins looming faster than you think -- and you have much less flexibility for planning for it later in life than you do early on. So I recommend you view retirement savings as the lender of last resort. Go there only if you have no other viable options. And if you are forced to dip into those savings, make it your first priority to replenish them.

Discipline is the key

OK, that's the simple three-step plan. Obviously, the hard part is pulling it off. Not that you have to be a rocket scientist to figure any of this out.

It's just that it takes discipline -- discipline to save rather than consume all you earn, discipline to stick with an asset allocation plan and avoid the siren song of flashy investments, discipline to avoid the temptation of dipping into your retirement accounts before you've actually retired.

But if you get into the habit of doing these things early, I think you'll increase your chances of success. And if you really get on board with this program, you may find that you can even save enough for retirement and allow your kids to go to college as you're doing now.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 p.m. ET on Monday afternoons.  Top of page

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