Question: What do you recommend focusing on as we get older, but before we retire? I'm in my 40s.

Ralph Atwood

Answer:

Dear Ralph,

Although there is no one size fits all answer to your question, there are some sensible and logical guidelines everyone should follow. You can adjust them depending upon (1) your salary; (2) the safety of your job; (3) your current savings and investments; (4) your family responsibilities; (5) your mortgage or rent; (6) your health and (7) the likelihood of receiving any inheritance.

Because people in their 20s and 30s also read this column, we'll cover some "beginner's steps" as well.

• As soon as you land your first job, you should start to save. Begin by putting away 1% the first month, 2% the second month, and so on. Aim to put aside 10% to 12% of your income annually.
  
  $Tip: Regardless of your age, your emergency nest egg should always be adequate enough to cover your living expenses for three to six months; ideally, for one year.
  
  
• Sign up for your company's retirement plan; if it's a 401(k), contribute the maximum.
  
  
• In addition, open an IRA. If you are self-employed, look into a SEP, SIMPLE or Keogh.
  
  
• Write your will.
  
  
• Begin to invest in stocks and bonds. (You can choose to open an account here at BUYandHOLD.)
  
  
• If you have children and haven't already done so, start an education savings account; Click HERE to read our recent column on the Coverdell account.
  
  
• Make certain you have life insurance (if you have dependents) as well as adequate homeowners (or renters) coverage and disability protection. Keep in mind, that the standard homeowners policy does not cover damage caused by flooding.
  
  
• As you reach your 40s, you should boost your annual savings from 12% to 20%.
  
  
• In your 40s and 50s, set aside time to draw up a durable power of attorney and look into long-term care insurance.
  
  
• In your 50s and thereafter, start to pay down your mortgage so you are mortgage free upon retirement.

Your Risk Level

Given your income and tolerance for risk... if you are seeking maximum growth to meet long-term goals (paying for college, retirement), a suggested asset allocation might be:

85% in stocks
10% in bonds
5% in cash

A more conservative allocation might be:

55% in stocks
40% in bonds
25% in cash

Bottom Line

In the past, I've recommended the financial calculators at www.dinkytown.net and I do so again as there are several you will find particularly helpful. Click on "Savings Calculators" and run the numbers. Then, under "Personal Finance," use the one that helps determine how much insurance one needs.

Good luck!

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