Retirement resolutions

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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NEW YORK (Money) -- Question: I've lost money in my 401(k) and I'm not interested in losing any more. So I'm thinking of moving my money into more secure investments. I know I can always change my allocations later, but what's the best way to keep my 401(k) stable until this roller coaster ride is over? --Michelle, Moravian Falls, North Carolina

Answer: I'm sure that most of us took a painful hit to the old 401(k) in 2008.

But as understandable as the urge may be to transfer all your money into the investments that seem safest - stable value funds, capital preservation funds, money market funds and the like - that would be a mistake.

Yes, you have the option of switching back into stock and bond funds later on. But getting the timing right is difficult, if not impossible. You could easily end up missing the early stages of a market rebound, which would make it even harder for your 401(k) to regain lost ground.

More importantly, though, by focusing on this ill-considered (and possibly ill-timed) investment move, you may be missing an opportunity to take a more comprehensive review of your retirement planning strategy overall. It's always a good idea as you head into a new year to make sure you're still on the right course with your retirement preparations. But it's especially important in the wake of an annus horribilis like 2008.

There are any number of ways to do such broad re-assessment of your retirement strategy. But in the spirit of the season, I'm going to suggest you do it by making and then following through on three key Retirement Planning Resolutions for New Year.

For example, if someone 35 years old who makes $40,000 a year and gets 3% annual raises contributes 10% of salary to a 401(k) that earns 7% a year, that person would have $535,000 by age 65. But if the markets whack that 401(k) for a 25% loss on the eve of retirement, its value would fall to just over $400,000, requiring this would-be retiree to significantly scale back his retirement lifestyle or postpone retiring altogether.

But if this person had socked away just two percentage points more a year, or 12% of salary, he'd have a 401(k) worth about $642,000. That same 25% hit would drop his account's value to roughly 482,000. While still a big loss, he might be able to retire on schedule by scaling back his spending a bit rather than postponing retirement altogether. Or he might not need to put off retiring for as long.

The point is that by saving more during your career, you'll end up with a larger nest egg than you otherwise would, which gives you more maneuvering room if the markets turn against you or, for that matter, if you find you're forced out of the workforce sooner than you would like.

I suggest that you check out our What You Need To Save tool. Once you've done that, I recommend that you see if there's any way you can boost your savings effort. By nudging your 401(k) contribution rate up a percentage point or two over a few years, you may be able to grow your nest egg significantly without feeling a big impact on your lifestyle.

Clearly, there are lots of moving parts here, so you can't nail down all these variables with decimal-point precision. But you can make reasonable estimates. You can then fine tune your planning as your circumstances change and as you near retirement (and even once you begin living it).

You can get a handle on these issues and create a roadmap of sorts toward retirement during your career by going to a tool like Fidelity's myPlan Retirement Quick Check.

When you're within, say, five to 10 years of retiring or if you're already retired, you can check out T. Rowe Price's Retirement Income Calculator, which can help you determine whether you'll have enough retirement income to maintain your standard of living. Or you can always hire a financial planner to help you come up with a plan at whatever stage of retirement planning you're in.

This is probably the hardest resolution to keep. The point of having a comprehensive plan is to set you on a course that can lead to a secure retirement even though the economy and financial markets will go through major upheavals along the way.

You can't predict these ups and downs in advance or insulate yourself from them entirely. But a plan based on reasonable savings and realistic investing should allow you to roll with the economic punches and improve your chances of reaching retirement with the resources you'll need.

The problem is sticking with the plan. When the markets take a dive as they have over the past year, there's a natural tendency to feel you must take quick action to protect your nest egg. The same impulse to act arises when the markets soar to absurd heights as they did in the late 90s. Unfortunately, following these urges usually leads to trouble. It makes us more apt to invest too conservatively after a market setback and more likely to take on too much risk when the market is approaching unsustainable highs.

So once you've gone to the trouble to create a plan, don't be so quick to dump it. Review it? Sure. Maybe you were overconfident when you originally set your stocks-bond mix, in which case you might want to re-think your asset allocation and re-assess how much you should be saving.

But if you abandon your plan whenever the economy slumps (or soars) or the stock market crashes (or takes off), then you don't really have a plan at all. You're winging it, which is the same as entrusting your retirement security to luck.

So let's start the new year by learning the right lessons from last year's debacles and resolving to get our retirement planning back on track. Good luck, and here's hoping that 2009 is a big improvement on 2008.