How to salvage your retirement savings

Rolled up money in a nest

With the stock markets down more than 40% and a recession throwing millions out of work, it's hard to even think about saving for retirement.

But how you manage your 401(k) and Individual Retirement Accounts over the next few months will go a long way toward determining your future financial security.

Here are our 9 smart moves for making the most of your retirement savings during tough times:

Smart move 1. Don't give up.

Resist the temptation to throw in the towel and yank all of your money out of your 401(k) or IRAs. Anyone looking at their latest statements must question whether it's possible to build even a modest nest egg in this economy, so why keep trying? The answer: We don't have any choice.

Most of us won't have traditional pensions, and living on nothing but Social Security is pretty hard. Early withdrawals also will result in lots of penalties and taxes that will just make your losses worse. Be patient.

Smart move 2. Hang on to your stocks and mutual funds.

Buy low. Sell high.

That's the mantra of money-making investors. If you panic and sell your stocks and mutual funds now, you'll lock in your losses and forfeit your ability to recoup that money when the markets recover.

We can't predict when that will happen, but here's what we can tell you with absolute certainty: You'll never be able to earn big enough returns with safer investments such as CDs and money market funds to build a substantial nest egg -- or even keep up with inflation.

For better or worse, you've got to take a risk on the stock markets.

Smart move 3. It's OK to reduce your contributions -- just don't stop altogether.

If you're worried about losing your job, or need to replace an old car or leaky roof, you need more money in your rainy-day account. Diverting some of the money you are putting in a 401(k) plan to more readily available savings is a good idea, especially since credit is harder to come by.

Smart move 4. Use a Roth IRA for your emergency fund.

Unlike traditional IRAs, your contributions are made with income that already has been taxed, and so contributions can be withdrawn and spent anytime they're needed with no penalties or additional taxes. Your earnings will continue to grow tax-free, even after you start withdrawals at age 59 1/2.

Be sure to shop for competitive expense ratios when opening a Roth so fees don't eat up your money.

Vanguard, for example, will let you open a Roth IRA with a small, initial deposit and invest that money in mutual funds with very reasonable fees.

For 2009, the contribution limit for Roth IRAs is $5,000; that phases downward for higher-wage earners. If you're over age 50, you can stash up to $6,000 under the catch-up provision.

Smart move 5. Never pass up free money.

Keep contributing enough to your 401(k) plan to qualify for any matching funds from your employer. If, for example, your company matches half of your contributions up to 6% of your income, don't cut your contribution below 6%.

Smart move 6. Position yourself for a rebound.

We don't know when stocks will turn around, but you need to re-evaluate and reallocate your savings to make the most of the next bull market. You can't recoup your losses by hoarding money in mutual funds designed to preserve capital, not reap gains. (That's where you should have put your money a year ago before the markets crashed.)

If you're 10 years or more from retirement, scout for bargains among beaten-down growth funds that invest in companies poised for a big rebound. If you'll need to tap your accounts in less than 10 years, shift to growth-and-income funds that are a little less risky.

Smart move 7. Avoid borrowing against your 401(k).

The middle of a recession is a bad time to borrow against your retirement account.

If you get laid off or otherwise lose your job, you must repay a 401(k) loan right away or it converts to a heavily taxed withdrawal.

If you're worried about losing your job, paying off a 401(k) loan is more important than paying off your credit cards. Talk to your payroll manager about options for upping your payback rate.

Smart move 8. Suspend college savings.

If you have to make a choice between your own savings and funding a child's college account, such as a 529 plan, stop the college savings and focus on yourself. Your son or daughter can always work, borrow, vie for scholarships, select a less-expensive school or otherwise adjust post-high school plans.

You can't stop the clock or change the fact that someday you'll be aging out of the workplace and dependent on your savings.

Smart move 9. Know your goal, but don't let it get you down.

Using our retirement calculator to determine how much you'll need for a comfortable future provides a great target.

But obsessing over the substantial sum of money that calculator or an investment adviser says you'll need 10, 20 or even 30 years from now can make investors feel hopeless when the markets aren't cooperating.

So stop. When you're ready to retire, you'll value whatever savings you have, even if you're short of your optimum goal.

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