'Road To Retirement' Runs Through 30s, 40s

Even though it may seem as if it's a long way off, the time to retire can be upon you before you know it.

And the better prepared you are for it financially, the more likely you are to enjoy it.

So, The Early Show's money maven, Ray Martin, prepared a special three-part series on retirement financial planning.

In part one Thursday, he stressed that such saving should really begin when you are in your 20s.

In part two on Friday, Martin focused on people in their 30s and 40s:

Don't Interrupt Retirement Savings

This is the time when other life events — getting married, buying a home, having children, etc. — can compete for more of your income, even as your income is, it is hoped, rising. It's all too easy to allow these other priorities to crowd out your retirement savings — but don't let that happen!

Some people think the home they own will be their main source of retirement savings. But there are significant risks in relying on your home equity as your long-term retirement income plan: The home may not appreciate, it may be costly to sell, and you will still need to consider alternative living arrangements and costs.

Also, some people with children are tempted to stop saving for their retirement in favor of putting money away for their children's college educations, which are also important. What you need to consider is that, while there are financial alternatives, such as loans, scholarships, etc, to help pay education costs, there are no such programs available to pay for your retirement.

Frequently, saving for retirement gets put on hold when a two-income household suddenly becomes a one-income household, such as happens often upon the birth of children.

A negative impact on retirement savings for workers who leave the workforce is that they don't continue to participate in an employer provided retirement savings plan such as a 401(k) plan. People who do this, even if only for a few years, need to continue to accumulate retirement savings in their name.

One way is to open and contribute to a Spousal IRA. As long as a married individual has a spouse who is working and earning an income, the individual in this situation should consider opening and contributing to a Spousal IRA, into which his or her income-earning spouse can contribute up to $4,000 per year ($5,000 if 50 or older). Spousal IRAs enable non-earning individuals to continue to accumulate retirement savings in their own retirement accounts, which provides additional individual retirement security in the event of divorce.

Contribute 10-15 Percent

By now, you should be contributing more than 10 percent to your 401(k) plan, because you were taking a part of each increase in pay to increase your contributions to your retirement savings. Also, as your income grows, more of it will be included in higher tax brackets. This makes the pre-tax contributions you can make into a 401(k) plan more valuable to you.

Auto-Increase Contributions

One of the more recent automated features provided by 401(k) plans of larger employers is called a "contribution escalator." It enables plan participants to set up future increases in their contributions to coincide with expected pay increases and, when set up, they're automatically processed.

So, if you are currently contributing 12 percent and next February you are expecting a three percent raise, then set the contribution escalator to increase your 401(k) plan contributions from 12 to 15 percent at that time, and it will automatically change for you.

If you find that the increase in savings wasn't leaving you enough net pay to get by on, then just log on to the plan's Web site or call the service center to reduce the increase a bit.

Invest For Growth

Since retirement is still a long time away, your retirement savings should still be invested mostly in stock funds. But now that your balance is larger, diversification becomes more important.

Chances are you will experience a stock market downturn. If the stock market falls 10 percent, a $100,000 portfolio invested 100 percent in stocks will fall in value by $10,000. On the other hand, if your portfolio was invested 75 percent in stocks, it would only fall $7,500, which would be easier to recover from.

Rebalance and Monitor Your Account

Unless you have signed up for an account management service, you can't simply treat your 401(k) account like the popular chicken roaster seen on TV: Do not just set it and forget it. Take the time to review your account and its performance at lease quarterly.

The good news is that most large employers' 401(k) plan Web sites now include a personal rate of return, which indicates the performance of your account. Also review the year-to-date performance of the funds in which you are invested and compare these to their peer-group index performance; that information is provided by most plans.

You also should be rebalancing your account at least annually; this ensures that funds that have grown to a larger proportion of your account are not allowed to become too large a portion, which would increase the risk of your account.

What you should do is rebalance your account funds back to the investment allocation percentages for each of your funds. So, if your account was allocated 80 percent to stock funds and 20 percent to cash and bond funds, and due to investment performance, it has grown to different proportions, then, by resetting your account each year, you will maintain the allocation percentages you had originally selected.

Many large employer plans also feature an "auto-rebalancing" feature, which you can set either on the plan's Web site or by calling the plan's service center. This automatic rebalancing feature will typically rebalance your account either quarterly or annually, and is typically offered at no cost.

A Milestone to Reach

According to the experts and studies, assuming you are looking to retire at age 65 and earn an average income, by the time you are 40, you should have accumulated 4 to 6 times your annual pay in retirement savings and be saving 15 percent or more of your income in your 401(k).

In part three of "Road to Retirement" on Saturday, Martin looks at retirement saving for people 50 and up.