Let 2008 be the year you finally carry through on your promises to pay more attention to your 401(k) retirement savings plan at work.
If you are like most people, you have had plenty of good intentions.
You have promised yourself that you will save more or figure out just which funds you should really be using.
But perhaps you have left money languishing in a savings account in a bank earning a measly 2 percent interest, when you might have earned an average of 8 percent to 10 percent a year in your 401(k). Or you might have made your 401(k) selections without much thought, like throwing darts, years ago and never revisited them. Perhaps dumb luck has enriched you, but you can't keep counting on luck.
Here's what you can do now to make your money work better for you in the future.
-- Know what you may need
If you accumulate $500,000 by the time you retire, you would be able to remove about $20,000 the first year you retire, increase it a little each year to handle inflation, and probably have enough money to last you to 90 or 95.
If you accumulate $1 million, you would be able to remove about $40,000 to $50,000.
To know with more certainty what you will need and how much you need to save, try the "ballpark estimate" at Choose to Save (www.choosetosave.org).
As a rule of thumb, if you start saving 10 percent of your pay in your 20s, you should be fine. If you start in your 30s, it's about 15 percent.
-- Don't rely on a savings account
Savings accounts in banks are no place for the retirement money you are trying to build. Savings accounts are for the stash of emergency money you might need over the next three to six months if you lose a job or encounter a major unexpected expense.
If you are 30, have $5,000 in a savings account, don't add another cent and leave the money invested for 35 years, you could end up with close to $10,000. In a 401(k), that same $5,000 would become $74,000 if you made 8 percent a year on stock and bond mutual funds.
Besides better investment options, the 401(k) helps you out more by holding taxes at bay. If you have money in a savings account, or an investment account outside a 401(k) or an individual retirement account, Uncle Sam shows up each year and makes you pay taxes on what you've earned. That's not the case with a 401(k). Every penny you put in a 401(k) stays there to keep earning interest. And Uncle Sam also gives you a tax break when you put money into your 401(k).
-- Grab the free money
Maybe you think saving $1 million by the time you retire is a complete fantasy--the world of rich people, not people like you.
You probably aren't considering the free money your employer will give you, or what's called matching money, when you contribute to your 401(k). The matching money can help turn modest savings into a giant sum over time.
Let's say that your employer follows a fairly common practice: If you contribute 4 percent of your pay to the 401(k), your employer will match 100 percent of the money. That's like getting 4 percent in extra pay a year.
Assume you are 30, making $50,000 a year, and every year until you retire at 65 you contribute 4 percent of your pay to the 401(k). Because you do that, your employer throws in another 4 percent.
Look at where that takes you: By the time you retire, you will be likely to have about $950,000.
If your employer hadn't been giving you matching money, and you invested 4 percent of your pay, you would have had about $475,000.
-- Don't stop with the match
Some employers do a good job of selling their employees on receiving the matching money they will offer. But don't stop with the minimum.
Let's say the same 30-year-old dips a little deeper into their paycheck each month, and contributes 7 percent of the pay.
That contribution, plus the employer's 4 percent match, ultimately adds up to big money by retirement, about $1.3 million, assuming the person invested in a diverse mixture of stocks and bonds and averaged an 8 percent return each year.
-- Finding a good mix
This is often more difficult for people than saving money, but it doesn't have to be. You just need to recognize a few words and then diligently make sure the mutual funds carrying those key words end up in your 401(k).
First, be aware that there is no such thing as a single "right" mutual fund. Often, people think the fund that has made the most money recently is the easy choice. But that approach is destined to get you into trouble because the stock market goes through cycles. As those cycles change, last year's winning mutual funds eventually will become losers, and the losers will turn out to be winners.
For example, last year international mutual funds, which invest your money in companies around the world, have been the winners. And funds that invest in large U.S. companies, or what are called large-cap funds, have been laggards.
But at the end of the 1990s, it was just the opposite. Investors loved large-cap funds and shunned international funds.
Those who followed that same practice in the 2000s would have missed out on earning about 21 percent a year in international funds. But no one can guess when the cycles will change. So do what financial planners do. They never try to pick the one best fund. Instead, they buy a variety of mutual funds and stick with the mixture, even when one of the funds temporarily looks like a disappointment.
They put some money in each of the following: A large-cap fund, a small-cap fund, an international fund and a bond fund.
-- Get the amounts right
To many people, deciding how to divide up their money in a 401(k) plan seems like rocket science, but it's not. The goal in investing in stocks is to partake in the economy of the world.
So here is what financial planners often do. Half of the economy is outside the U.S. and half is on home turf. But foreign seems "foreign" to people. So planners often will put about 70 percent to 75 percent of a client's stock money in U.S. stock funds and 25 percent to 30 percent in one or two international funds.
The U.S. stock portion is easy too. About 75 percent of the U.S. stock market is large companies, so financial planners put 75 percent of a person's U.S. stock money in one or two large-cap funds. A single Standard & Poor's 500 index fund would do the trick in a 401(k).
The remaining 25 percent would go into smaller companies, maybe half into what's labeled as a small-cap fund and half into a mid-cap fund. Small caps are just small companies. Mid caps are companies that are a little larger.
If your 401(k) has some funds that are marked "growth" and "value," you can divide your money up half and half for each category.
The growth funds try to pick stocks that grow fast. The value funds try to pick cheaper stocks. In cycles of the market, the two types of funds act differently.
When in doubt as you decide on investments, you always can fall back on the classic blend: put 60 percent of your money in stocks and 40 percent in bond funds.
Here's roughly what that portfolio would look like:
-- 30 percent of your money in large caps, maybe divided 50/50 in a large-cap growth fund and large-cap value fund.-- 5 percent in mid caps, divided between growth and value.-- 5 percent in small caps, split between growth and value.-- 20 percent in international funds.-- 40 percent in bond funds, or perhaps 35 percent in bonds and 5 percent in a money market fund.-- Pay attention to age
If you are in your 20s, 30s or even 40s, some advisers would suggest you put more money into stock funds and less in bonds, maybe dividing your money 70 percent into stocks and 30 percent into bonds. But with the economy weakening, now might not be the time to become overly aggressive in a volatile stock market.
It depends on how you feel about periods when the stock market is going down.
When you are young, you can recover from downturns. But waiting for that can take a long time.
The key for all the mixtures is to stay put so you regain what you have lost.
If you want to make this easy on yourself, and your 401(k) offers funds with target retirement dates such as 2020 or 2025, you can choose these. The fund managers pay attention to your age and invest in the mixture of stocks and bonds that is appropriate for people your age.
Gail MarksJarvis is a Your Money columnist.Copyright © 2015, Los Angeles Times