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Investing for retirement

Question: After many years of false starts, my wife and I will soon be able to finally start saving for retirement. I'm 38 years old, and after watching so many 401ks turn into 201ks, I'm more than a little worried about saving with this method. I've listened to the show for years, so I know about TIPS, I Bonds, etc, but I'm hoping you may provide some more advice about ways to save for retirement that don't involve taking on all of the risk of a 401k. Thank you very much. Andy, Spring Hill, TN

Answer: Congratulations on getting started. . Most of us are reluctant plungers in the market these days. We're supposed to figure out how to invest our money for when we retire in 10, 20 or 30 years. Yet in today's world, the biggest mistake you can make is not saving for the long haul. The financial penalty for not participating in a long-term savings plan is far bigger than the risk of picking a poorly performing mutual fund.

That said, a 401(k), an IRA, and similar retirement savings plans are simply tax sheltered parking place for savings. You can put the money into more conservative investments, like Treasury securities and certificates of deposit, as well as riskier investments, such as stocks and junk bonds. So, the risk to your savings is minimal if you invest in Treasury Inflation Protected Securities, short-term CDs, and the like. The gain won't be much either. That's a reasonable trade-off for most people to make, especially anyone who doesn't want to see their 401(k) become a 201(K)--and is willing to give up the possibility that it becomes a 601(k).

When it comes to retirement savings the basic money question you should ask yourself is not "How much money will I make on my investments?" The real question is "How much can I afford to lose?" You then lock in a standard of living for your old age with a conservative investment strategy. You don't want to be 70 years old with a portfolio that has lost half its value.

I have two books to recommend. The main points of both books can be quickly absorbed, so this isn't like assigning homework. But you've raised a huge important topic and both of these books cut to the core issues in easily digestible chunks. Worry Free Investing by Zvi Bodie and Michael Clowes advocates a very conservative approach to retirement savings (largely based on TIPS). The Random Walk Guide to Investing by Burton Malkiel is also conservative (he strongly advocates for diversification) but he makes a stronger case for putting a portion of the portfolio into equities. Good luck.

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