Personal Finance: In saving for retirement, no such thing as too soon

You might be scared, but that's not always bad - if you channel it into action.

The stock market and housing market crash, plus rising unemployment and harsh credit card terms, have made Americans aware that their financial futures are fragile. But out of the pain has come laudable behavior: People are thinking twice before spending on a whim, for example.

Now it's time to take it a step further: No matter your age, you probably need to save more for retirement, and to invest more wisely.

Here's what to do, at the beginning of adulthood, and through the mid-career years.

A 22-year-old who invests $2,000 a year every year until retirement - or roughly $38.50 a week - would end up with about $611,000 by age 67, supposing about 7 percent a year on average on the investments. It would provide only about $24,440 a year to live on, plus annual inflation adjustments.

For $40,000 a year, roughly a $1 million nest egg is necessary. But that would mean investing about $3,300 a year.

If you think you can't afford to save much, start small - even 1 percent of pay - and increase it with every raise or windfall.

If you save nothing by your early 30s, instead of saving $3,300, you will have to stash about $6,500 to get close to $1 million. In your early 40s, it will take about $14,500 a year. To maximize your savings, put them into a 401(k) at work. Many employers provide free matching money.

Say you make $30,000 a year, and your employer will match the first 3 percent of pay that you put into the 401(k). That's $900 a year from your employer, and if it goes into the 401(k) yearly and earns 7 percent, that will give you about $275,000 by retirement on top of your own savings. Experiment at http://go.philly.com/retire.

And when you save in a 401(k), you also cut taxes.

To make the most of this opportunity, consider investing about 70 percent to 80 percent of your 401(k) money in a Standard & Poor's 500 index mutual fund, and the rest in a diversified bond fund. That index fund is a stock investment and might strike you as overly risky after the decline the market just encountered.

But people in their 20s should do well over time. By combining 70 percent in the stock market and 30 percent in government bonds, an investor would have averaged an 8.9 percent return a year over the last 83 years, according to Ibbotson Associates.

When should you bypass a 401(k)? If you have no emergency fund, and are worried about losing your job, you should save for the possibility of a job loss in addition to retirement in a Roth individual retirement account. Money you put into such an account can be removed at any time without penalty.

Saving for retirement should take precedence over saving for a child's college education. As a rule of thumb, if you save 10 percent of pay starting with your first job, you will be fine in retirement. Find out how you stand at ChooseToSave.org. Do the "ballpark estimate."

To maximize savings and shield them from taxes, put up to $16,500 a year in your 401(k) and an additional $5,000 in a Roth IRA. At age 50, you can put up to $22,000 a year into the 401(k) and $6,000 into the Roth, assuming you fall within the Roth income limits. Up to age 40, advisers suggest investing about 70 percent of your retirement money in stock mutual funds. If the downturn subjected you to more loss than you can stand, cut back to 65 percent or 60 percent.

By 50, having only 60 percent in stocks is considered prudent, although not immune from losses. If you were shocked by the downturn, put 50 percent in stock funds and 50 percent in bond funds. Investors have never lost money over a 10-year period with such a portfolio, according to Ibbotson.