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Saving for retirement

Question: I am a 55 year old divorced female who owns my own fledging consulting business. I have no retirement savings except Social Security. As part of my divorce many years ago I will be shortly be receiving my portion of my ex-husband's retirement fund as determined by a QDRO. [A Qualified Domestic Relations Order allows for the division of retirement plan assets in a divorce.CF]

I must roll it into a 401K to avoid any penalties of course but wonder what is best to do with it once it is in a fund. What is the best kind of 401K? Should I invest in some medium risk stocks as long as I can do something to guarantee the principal?

I am very much a novice at this and as you can probably understand by the fact that I have virtually no retirement savings -- have not been especially good about savings in the past. Lucy, Baltimore, MD

Answer: Congratulations on getting your consulting business off the ground. You're already taking on a lot of financial risk by being an entrepreneur. That fact alone suggests your savings should lean toward the secure and cautious. What's more, you say you're a novice at investing. That, too, suggests investing conservatively in a retirement savings plan. Last, you want to avoid the temptation of rolling the stock market dice to make up for lost time. Stocks are simply too risky for that kind of bet.

In thinking about your question maybe the best advice I can give is for you to pick up a copy of "Worry-Free Investing" by Zvi Bodie and Michael J. Clowes. Bodie is a leading finance professor at Boston University. Michael Clowes is editor at large at Pensions & Investments, a trade publication. The book was published back in 2003 in the wake of an earlier bear market in stocks and it remains a book for the times. Instead of asking, "How much money will I make?" they're wondering about the more fundamental financial question, "How much can I afford to lose?" Their basic message fits in with your question.

What's the answer? Their preferred investment for long-term retirement savings is U.S. government inflation protected securities. These securities preserve the purchasing power of a dollar against the ravages of inflation. Inflation is the enemy of long-term savers. Think about it: One hundred dollars loses half its value in 20 years with a 3.5% average annual rate of inflation. The same sum falls by about a third over two decades even at a modest 2% inflation rate. Of course, you'll take a lower payout on your savings in exchange for the inflation protection, but it's worth it. The authors deal with other conservative investments. They aren't stock-phobic, they'd just prefer that individuals roll the stock market dice only after looking after their baseline financial goals. I think a book like this might give you some needed guidance.

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