Dollars and Sense

Updated Jan 2, 2010

Take control of your retirement

It’s a shame that in one of the wealthiest nations in the world, over 90 percent of the population is not financially independent at retirement. Follow these steps to put yourself in the other 10 percent.

The best way for you to save is through an Individual Retirement Account because you are self-employed. Your financial adviser can fill you in on whether other forms of an IRA, such as a SEP IRA or Roth IRA, would fit your needs.

The IRA itself is an account type, but you will have to choose what you invest in. Most common is one or more mutual funds. Each one represents a pooled collection of investments in certain stocks and bonds. The advantage of an IRA is that your money grows faster because it’s tax-deferred – you pay no tax on your earnings until it’s withdrawn.

It’s possible to open a retirement account through your bank, but banks are usually very limited in fund choices and most often sell their own funds, which may not be in your best interest. They also tend to sell funds with higher fees and charges.

Many investors choose no-load mutual funds, which charge no sales load for advice or administration. However, read any fund prospectus closely because there are other variations of loads and fees. An Internet search for no-load mutual funds will bring up thousands of results.

The strategy I’ve used for myself and my clients involves index mutual funds, which mirror a financial index, such as the S&P 500. Index funds are virtually the same no matter which mutual fund company creates them, which makes your choice easier. Because they’re not managed by someone who decides what stocks to buy, index funds are much less costly and complex.

Here is a simple plan for your beginning years of investing. Divide your money up into three types of indexed mutual funds. They should include:

• A large cap index fund such as one based on the S&P 500

, which represents 500 large companies in diverse industries.

• A small cap index fund, which includes companies with small capitalization.

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• A European/Asian index fund, which should yield the best of emerging markets around the world.

There’s nothing fancy or original about this plan. But it will put your retirement on autopilot, and might well outperform many high-priced money managers. n

The power of tax deferral

If you save $300 a month for 20 years in a taxable account and achieve a 10 percent rate of return, you will accumulate $157,230 after taxes. If you invest that same $300 in a tax-deferred account, you would accumulate $227,811, though taxes will be levied upon withdrawal.

To run quick estimates of savings amounts over various time spans and with different rates of returns, try the free online retirement calculators at or

calendarFunds that adjust as you age

If you are seven to 10 years from needing retirement income, you could invest in what is called a target date mutual fund. If you’re 55 years old and planning to retire at age 65, your target date would be in 2020, so you would buy a 2020 target date fund.

The fund is designed to gradually reinvest your money each year into less risky investments to protect your money as you get closer to needing it. That way, if there is a severe downturn, the value of your nest egg will not change dramatically. Most, if not all, of the major fund families offer such a product.

With this type of account, invest as much as you can each month and don’t worry about what is happening to the stock market. Don’t even look at the balance of your accounts. Just keep saving month after month and trust that your investments will grow by the target date.