The 12 new rules of retirement savings

Highway sign with Retirement-Next Exit

The era of do-it-yourself retirement is here.

You can't rely on your employer, or the government, to take care of you in your old age.

The grim reality is that we can't guarantee that you'll be able to save enough for a comfortable retirement, even if you do everything right.

But following these 12 new rules for retirement savings gives you the best shot at success.

Rule 1. Work to get as close to your goal as possible.

To retire comfortably, you'll need enough savings to replace at least 60%, and preferably 80%, of your preretirement income.

If you make $65,000 per year, want to retire about 30 years from now and replace 70% of your income for 25 years, you'll need to save a whopping $2 million.

Our retirement calculator allows you to see how much you'll need -- and it's a shocking number.

You should be shocked by this number. Now that you see what kind of challenge you're facing, use it to motivate all of your future decisions.

Just remember: Even if you can't possibly save that much, the more you have, the better it will be. Retiring with half of your goal is a lot better than retiring with none of it.

Rule 2. Take advantage of your employer's 401(k) plan...

These plans allow your retirement savings to grow tax free, and it's virtually impossible to reach any goal if you don't take full advantage of that.

This is one of the two biggest tax breaks the government offers middle-income Americans, right up there with the mortgage interest deduction.

Many employers also match all or part of your contributions, another big boost you simply can't ignore.

Rule 3. ...and Individual Retirement Accounts.

If you don't have access to a 401(k), open an IRA. In fact, even if you have a 401(k) at work, you should open an IRA, too.

Whether you choose to contribute to a traditional or Roth IRA, the advantage is the same as for a 401(k) -- your earnings can grow tax free.

In 2010, you can contribute up to $5,000 per year (or $6,000 if you're 50 or older) to a traditional or Roth IRA.

Rule 4. Set aside as much as you possibly can every year.

You can do everything else right, but if you don't save as much as you can every year, you're selling yourself short.

It's ok to start small, contributing 2% or 3% of your pretax income to a 401(k) plan.

But if you can't boost that to at least 10% to 15% of your pretax income, you'll have a hard time building a substantial nest egg.

Rule 5. Put most of your retirement money in stocks.

You might not earn a big enough return with stocks to reach your goal -- or close to it.

But you almost certainly won't earn enough with any other type of investment.

You need an average return of 7% or 8% a year to succeed, and stocks are the only type of investment that's posted such lucrative returns over an extended period of time.

Playing it safe by putting your money in certificates of deposit or money market funds that pay 1% or 2% a year won't cut it.

Rule 6. Understand the value of time.

When it comes to retirement, time can work in your favor. The longer you have to save and let your money grow, the larger your nest egg will become.

The first $100,000 takes the longest to save, and the biggest returns will come in a rush near the end of your working life.

Think about it this way: An 8% gain on $50,000 is only $4,000, but an 8% gain on $300,000 is $24,000. As your portfolio grows larger, each year's gains will grow larger as well.

Rule 7. Never cash out a 401(k) when you change jobs

Nearly half of all workers cash out their 401(k) when they change jobs. They not only have to pay taxes on the money, but they have to pay a 10% penalty to the IRS.

This is the single biggest wealth killer. If you have $10,000 in your 401(k) that you've been building up for years and just cash out, you might be lucky to walk away with $7,500.

You need to roll your retirement savings into an IRA or a 401(k) plan at a new employer. You'll never reach your first $100,000 by cashing out.

Rule 8. Have an emergency savings account.

Put aside money outside of your retirement accounts so that you don't have to tap them in case of an emergency. Six months of living expenses is usually a good rule of thumb.

You never know when you might need money due to an auto accident, job loss, death in the family or a stroke of bad luck. At a time like that, you don't want to raid your retirement fund and trigger taxes and penalties.

Rule 9. Think of Social Security as gravy.

Despite everything you've heard about Social Security's financial problems, it will almost certainly be there for you, even if you're in your 30s or 40s -- or even your 20s.

But it's almost impossible to predict how changes in the program might affect future benefits.

So think of your Social Security payments as the gravy on your retirement plans -- an extra check that can make up part of any shortfall in your retirement income if you can't reach your savings goal.

Rule 10. Be entrepreneurial.

At some point, you should try to stop working for someone else and work for yourself. One way to get ahead is to be an owner and benefit from the profits. One of the secrets of "The Millionaire Next Door" is that many were small business owners.

Being self-employed might also enable you to eventually move into a state of semiretirement. If you don't meet your retirement goal, you'll have the option to fill in the financial gaps by scaling back your business and working part time.

Rule 11. Save big gifts and inheritances.

A $20,000 inheritance, gift or windfall can be like adding years of savings to your nest egg. If you're already comfortable living on your existing salary, don't blow it on something like a BMW.

Let time grow that money for you. If you threw that $20,000 in your retirement pool and earned an average annual return of 8%, 30 years from now you'd have an extra $200,000.

Rule 12. Your home is just a place to live.

The real estate bubble fooled some people into believing that they didn't have to save for their retirement and they could just live off the appreciation in their home.

They know better now -- and so should you.

The smart thing is to consider your home a place to live, not an investment.

If you ultimately make some money from it, great. You can use those profits to make up any shortfall in your savings.

It's gravy, just like Social Security.

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