The best way to do this is to set up an automatic investment system that pulls money out of your checking account each month and invests it in your Roth IRA. Do not leave this to your own best intentions; even if you vow you will make monthly contributions it can be hard to stick with a plan, especially when unexpected expenses pop up. It's best to make this an automatic system that takes you out of the equation. The discount brokerage or fund firm you choose for your IRA will have an easy form for you to fill out that authorizes a monthly (or quarterly) transfer from a bank account to your IRA.

Where to Open an IRA AccountI recommend you use a reputable discount brokerage firm such as TD Ameritrade, Fidelity, Schwab, ING, Muriel Siebert, Scott-trade, or Vanguard. I prefer discount brokerages or no-load mutual fund companies because of their low (or no) trading costs, low account fees, and low-expense mutual funds and ETFs. Banks and insurance companies that offer IRA accounts typically charge higher fees. I'd prefer you keep every penny you can invested for retirement, rather than allow any to go toward paying fees. For that reason, discount brokerages or the mutual fund company itself are your best options. Under no circ.u.mstances would I open a Roth at a bank, credit union, or insurance company.

STEP 3. Increase Your 401(k) Contributions If you max out on your Roth IRA contribution and you still aren't at your 15% savings goal, then you are to increase your 401(k) contribution (match or not) to get you to 15%.

STEP 4. Save in a Taxable Account If you don't have a 401(k) and you have maxed out on your IRA for the year, you can keep saving more in a regular taxable account. A great strategy is to create a portfolio of a few ETFs. Unlike mutual funds, there typically is no annual tax bill with ETFs; the only time taxes are owed is when you sell your shares at a gain. That's a great way to invest for your long-term retirement goals.

That's it-four steps.

LESSON 4. INVESTING YOUR RETIREMENT MONEY INVESTING YOUR RETIREMENT MONEY.

Making the commitment to contribute to a 401(k) and an IRA is just half the job. You must also take responsibility for choosing the investments you own inside these accounts-yet another task prior generations didn't have to stress over.

Based on the countless questions I get about this subject, it's clear to me that many of you are totally confused about how to allocate the funds in your accounts. When I ask you how your retirement money is invested you typically tell me you have a 401(k) or an IRA. I then ask again, "Yes, but how is your retirement money invested? invested?" and you look at me like I am nuts because you just told me you had a 401(k) or an IRA.

Please understand that a 401(k) and an IRA are simply retirement accounts that hold your investments. You must choose what investments to put inside your accounts. If you don't make that choice, your 401(k) or the brokerage firm that handles your 401(k) will often just leave your money in a cash account. Another common scenario I see is that you try to invest the money in your accounts but you get overwhelmed and panic and you decide that cash is the best option.

And I know that some of you aren't investing because you have no faith that investing is the way to go, period. You were spooked by the volatility of the stock market in 2008. The investing community is well aware of exactly how you feel. The CEO of one of the largest mutual fund companies has publicly laid it out that the financial services industry is on the verge of losing an entire generation of investors-young adults like you-who have experienced a whole lot of bear market pain without any offsetting bull market upside to temper your nerves and perspective. In a recent survey of investor att.i.tude toward risk, the biggest drop in a willingness to take investment risk was among the youngest investors-those below the age of 35.

That makes complete sense. No one, not even financial industry honchos, would fault you for feeling that way given what you have lived through. But I am going to ask you to summon all your stand-in-the-truth strength and fight through those feelings. I am not asking you to forget those feelings, nor am I suggesting you are wrong for feeling hesitant to invest in stocks.

But here's where we need to think through what your dream is: retirement. You are not retiring next year, or next decade. It's a dream that is 30, 40, maybe even 50 years off. Yes, I am going to hit you with another riff on the power of time.

The first time-sensitive issue I need you to grasp is that by playing it safe today and keeping all your money in bonds and cash you will miss out on the opportunity to earn returns that exceed the inflation rate. And make no mistake, you must focus on earning inflation-beating gains. It's simple: If your savings do not increase enough to counteract inflation you will not be able to maintain your standard of living in retirement. So I am here to tell you that you must consider investing a portion of your portfolio in stocks.

Just as a guidepost, keep in mind that the long-term average rate of inflation is about 3.5%. So at a minimum you want your investments to be earning at least that much, preferably more. If you are invested in the most conservative option in your company 401(k)-it can be a money market fund or a stable-value fund-you are not earning more than 1%, if that, right now. Yes, a money market or stable-value fund is "safe" in that its value will not go down, but when you are investing for a goal that is decades away you must also think about the risk of your money's purchasing power not keeping up with inflation.

UNDERSTANDING THE UPS AND DOWNS OF THE STOCK MARKET.

The truth is, right now is an absolutely fabulous time to be investing if you won't need that money for decades. None of us can predict with 100% accuracy what is going to happen in the stock market over the next few years, or even the next few months. But when you are investing in a retirement account that you will not use for decades, you shouldn't be focused on what happens right now. To be totally honest, you should look at any market drop as a good investing opportunity.

Now why do I say that? Because when the market goes down you can buy stocks on sale. If you needed that money in a few months or a few years there would be the risk that the price might be even lower. But that's not what we are dealing with here. You have two, three, or four decades until you retire and then you could live another 25 years in retirement. So you shouldn't really care what happens to the stock over the next few years. What you want to stay focused on is the long term and the long-term trend is that stock values rise. Therefore you absolutely want to have some of your portfolio invested in stocks.

And the next time the market starts to slide and your nerves start to justifiably rattle, come back to this truth: When you are young the ability to buy more shares at a lower price is an advantage, not a disadvantage. Look, I am not asking you to break into a celebratory jig every time the market falls. But don't run the other way in panic either. Do not bail. The downdrafts are in fact a great opportunity to build retirement security. That brings us to the importance of dollar cost averaging.

TAKE ADVANTAGE OF DOLLAR COST AVERAGING.

One of the great aspects of making periodic investments in your 401(k) and IRA is that it helps you take advantage of an investing strategy known as dollar cost averaging (DCA). By consistently investing sums every paycheck into your 401(k), or making monthly transfers from your checking account into your IRA, you will sometimes purchase stock when prices are high and sometimes when they are low. But the average over the entire time you are investing is far better than trying to invest one big lump sum-a.s.suming you have it. When you use DCA you smooth out your average purchase price. And if you have decades until you will even begin to need the money, the likelihood is that those shares will have grown in value over that time. Moreover, committing to a steady and automatic savings plan-that's what dollar cost averaging is at its heart-ensures you will stick to your periodic investing. And that's the most important step in realizing your retirement dreams.

Buying stocks for your retirement accounts when values are lower is actually what you want. Yes, you read that right: I said you want stock prices to be lower, not higher. Let's say you have $100 to invest and a stock trades at $12 per share. Your $100 will buy about 8 shares. But if the stock price is $10 you get 10 shares. Now let's jump ahead to some future date when the stock is at $15 per share. If you own 8 shares your account is worth $120. If you have 10 shares, your account is worth $150. See what I mean? When you are young and have decades until you will need your retirement money, the ability to buy more shares when prices go down is what you should be rooting for. The ability to save for retirement when prices are lower is a big advantage.

HOW MUCH TO INVEST IN STOCKS.

The reality is that each of you must decide for yourself how much of your money to invest in stocks. If you were among those who've developed a fear of the market, I hope I have convinced you to rethink your position. Now, that said, I am not telling you to back up the truck and pile everything into stocks. No, no, no. Do that and you can't help but panic when there is a big market drop. Besides, historically, having at least 20% or so of your account in less volatile investments-such as bonds-has generated almost as strong gains as a 100% stock portfolio, but with less dramatic price swings when the markets go down.

What you want to do is create a mix of stocks as well as bonds and cash. A general rule of thumb worth considering is to subtract your age from 100. So if you are 35, consider a portfolio that has 65% or so in stocks. And just to make sure we're all agreed on why you can't afford to be 100% in bonds and cash: because your money will likely not grow at a rate that can keep pace with inflation.

The bottom line is that you do not want to be an either/or investor. You want both. Some stocks, some bonds. Your 401(k) plan or the discount brokerage where you invest your IRA likely has a free calculator to help you determine an age-appropriate mix of stocks and bonds that is in line with your appet.i.te for risk. Or anyone can use the a.s.set allocation calculators at vanguard.com and and troweprice.com.

I think I have been quite clear that the absolute best move for you is to invest a significant portion of your money in stocks when you still have decades to go until retirement, let alone the two or three decades you could live in retirement. That is indeed my best advice. But if you remain unconvinced, and your truth is that you never want to have much or any of your money invested in the stock market, that's your truth to stand in.

But you must also accept the truth of the trade-off you are making: If you do not invest in stocks you will have no opportunity to generate inflation-beating gains. Therefore you will have to commit in a serious way to two important adjustments: * Save more Save more. This is simple math: If your portfolio will be invested in only lower-risk investments that might average 34% or so, you need to save more than if you were invested in a mix of investments that might produce returns of, say, 6% or so. Let's say you are investing $500 a month for retirement. If that account earns an average annualized 6% a year for 40 years it would be worth about $995,000. If it earns an average annualized 4.5%, it would be worth $670,000. If you want to end up with the same $995,000 you would need to increase your monthly savings to about $740 a month.

* Plan on living on less in retirement Plan on living on less in retirement. If you make less on your retirement investments, then you will have less to support you in retirement. That isn't necessarily a problem if you create a lifestyle where you are in fact living below your means and can continue that way in retirement. But there's no way in your 20s and 30s to antic.i.p.ate what your expenses will be 40 and 50 years from now. It's hard to know what they will be 2 years from now! However, I can tell you that if you live honestly today-below your means, but within your needs-you will not only be able to save for retirement, you will have a less expensive lifestyle to maintain in retirement. But if you are saving less today and not investing for growth, and you are not living below your means, well, there is not any sort of truth in there.

CHOOSING THE BEST OPTIONS WITHIN YOUR 401(K).

In most 401(k) plans your employer will offer you investment options that are usually made up of 12 or so mutual funds and possibly their company stock. And then it's up to you to figure out how to invest among all those options.

Many 401(k) plans also offer a simpler approach: a target-date retirement fund that makes all those allocation decisions for you, so rather than have to figure out the right mix of different types of stock and bond funds you can invest in the target fund tied to your expected retirement date-the year will be listed in the name of the fund-and the fund company will take charge of deciding how to allocate your money within the target fund among different types of investments. The way most target funds work is that they own shares in a bunch of other funds. Through one single investment you are buying smaller shares of a mix of different stock and bond funds.

My strong preference is that you do not use a target-date fund. I recognize they are much easier-you just find the right target date, put all your money in them, and you're all set. My primary concern with target retirement funds is that no matter your age, a portion of your money will be invested in bond funds. I have never liked bond funds. Bonds, yes, but not bond funds, and for one simple reason: Since there is no set maturity date for a bond fund, you are never guaranteed you will get your princ.i.p.al back, as you are with a bond (a.s.suming of course that the bond does not default, which is indeed extremely rare). And right now I think it is very dangerous to have any money in long-term bond funds. As I write this in early 2011, interest rates are at historic lows. They may stay there for a bit, but eventually they will need to rise. And the way bonds work, when rates rise, the price of the bond falls. If you are invested in a bond fund that focuses on long-term bonds, you will suffer big losses. And if you are in a target retirement fund you can't control what your bond portion is invested in. You may be stuck with some of your money in long-term bonds. Therefore I would much prefer that you build your own portfolio of funds from the menu that is offered in your plan.

HOW TO BUILD THE BEST 401(K) INVESTMENT PORTFOLIO.

1. Decide on your mix of stocks and bonds/cash Decide on your mix of stocks and bonds/cash. As I mentioned earlier, this is yours to determine, based on your truth. From a purely financial perspective, when you are young the majority of your money should be invested in stocks. Start with the rule of thumb of subtracting your age from 100. So a 30-year-old might aim for 70% in stocks. If you're feeling less or more confident about your ability to sleep well in volatile times, adjust accordingly; I would rather that 30-year-old ratchet down to 60% in stocks so she can feel more confident during rough times, than have her commit to 70% or more and then panic when the market slides and pull out of stocks completely.

2. Look for the lowest-fee funds offered in your plan Look for the lowest-fee funds offered in your plan. Every mutual fund offered within your plan charges what is known as an annual expense ratio. The annual expense ratio is deducted from a fund's gross return. For example, if a fund earns 5% and its expense ratio is 1%, the real return you will get is 4%. Some funds have expense ratios above 1.5%. Others, such as index funds, charge just 0.20%. Make it a goal to first find the funds with the lowest expense ratios in your plan. Keep an eye out for any funds that are index funds. This means the fund mimics the investments of a fixed benchmark index, such as the S&P 500, rather than relying on a portfolio manager to decide what to buy and sell. Most index funds have lower expenses than managed funds. Low-cost index funds are a reliable option.

3. For the stock portion: For the stock portion: Typically 401(k) plans offer funds for large, medium, and small companies. It's a good idea to allocate a portion of your portfolio into each category. Stocks of large established companies can provide steadier returns-and often dividends-while midsize and smaller companies typically hold the possibility of bigger growth opportunities. Take a look inside your 401(k) plan to see if there is an index fund with the name Total Stock Market. The "total" means it invests in a mix of large, midsize, and smaller companies. That's a great way to own big and small companies. An index fund with the term "500" means it is focused on large-cap stocks that are part of the S&P 500; that, too, is a fine choice, though you might want to put a small portion of your money in other funds within your plan that also invest in midsize and small cap funds. Typically 401(k) plans offer funds for large, medium, and small companies. It's a good idea to allocate a portion of your portfolio into each category. Stocks of large established companies can provide steadier returns-and often dividends-while midsize and smaller companies typically hold the possibility of bigger growth opportunities. Take a look inside your 401(k) plan to see if there is an index fund with the name Total Stock Market. The "total" means it invests in a mix of large, midsize, and smaller companies. That's a great way to own big and small companies. An index fund with the term "500" means it is focused on large-cap stocks that are part of the S&P 500; that, too, is a fine choice, though you might want to put a small portion of your money in other funds within your plan that also invest in midsize and small cap funds.

I recommend that 85% of your money be invested in the Total Stock Market fund or a mix of large/midsize/small funds offered in your plan. If you build a mix of large/mid/small funds you might consider following the lead of how a Total index fund currently invests in the three types of stocks: about 70% large caps (S&P 500), 20% midsize, and 10 percent or so in small caps.

The other 15% of the stock portion of your retirement account should be earmarked for an international fund. A diversified international fund that focuses on both developed markets and faster-growing emerging markets is your best move. Or if your plan offers a choice of different international funds, put 10% in the developed markets fund (it may have the abbreviation EAFE EAFE in it-that stands for an index of developed countries in Europe, Australasia, and the Far East) and the other 5% in an emerging markets fund. in it-that stands for an index of developed countries in Europe, Australasia, and the Far East) and the other 5% in an emerging markets fund.

Just be sure that before you invest in the emerging markets fund, you check to see if the main international fund offered within your plan already invests a portion of its a.s.sets in emerging market stocks. Your plan's website may have access to this portfolio information. If not, you can find it at the Morningstar.com website. Just type the five-letter ticker symbol for the fund in the search box at the website, and then click on the Portfolio tab. If that fund already has exposure to emerging markets, you can just stick with that one investment. website. Just type the five-letter ticker symbol for the fund in the search box at the website, and then click on the Portfolio tab. If that fund already has exposure to emerging markets, you can just stick with that one investment.

A word about company stock: Some public companies allow 401(k) partic.i.p.ants to invest in company stock. In fact the matching contribution is often made in company stock. You are never to let your investment in any single stock-regardless of whether it is the stock of your employer-amount to more than 10% of your total invested a.s.sets. I found it so sad when I learned that more than one-third of BP's 401(k) a.s.sets were in fact invested in BP stock. When that stock fell sharply after the 2010 oil spill, the value of BP employees' 401(k)s took a huge hit. This has played out before, the most extreme case being the collapse of Enron, an energy giant, many of whose employees had all their retirement funds invested in the company stock. This is another stand-in-the-truth challenge: We ultimately can never ever be 100% sure about any single investment. To think you know better, or that it could never happen to you, is a dangerous act of financial dishonesty. The honest step is to limit any single stock investment to no more than 10% of your overall portfolio. Then divide the rest of your stock portfolio according to my 8515 split between U.S. and international stocks. Some public companies allow 401(k) partic.i.p.ants to invest in company stock. In fact the matching contribution is often made in company stock. You are never to let your investment in any single stock-regardless of whether it is the stock of your employer-amount to more than 10% of your total invested a.s.sets. I found it so sad when I learned that more than one-third of BP's 401(k) a.s.sets were in fact invested in BP stock. When that stock fell sharply after the 2010 oil spill, the value of BP employees' 401(k)s took a huge hit. This has played out before, the most extreme case being the collapse of Enron, an energy giant, many of whose employees had all their retirement funds invested in the company stock. This is another stand-in-the-truth challenge: We ultimately can never ever be 100% sure about any single investment. To think you know better, or that it could never happen to you, is a dangerous act of financial dishonesty. The honest step is to limit any single stock investment to no more than 10% of your overall portfolio. Then divide the rest of your stock portfolio according to my 8515 split between U.S. and international stocks.

4. For the bond/cash portion: As noted above, I think bond funds are dangerous, but individual bonds are good. Bond funds, in my opinion, absolutely are not. But within your 401(k) all you have access to is funds. So my advice for the next few years in particular is to steer clear of bond funds completely. If your 401(k) offers a GIC (Guaranteed Investment Contract) fund or a stable-value fund-these are other low-risk investments-I prefer them to bond funds. But if you absolutely, positively want to invest in bond funds within your 401(k), please stick with shorter-term funds with average maturities of five years or less. In the coming years I expect interest rates will begin to rise off their current historic lows, and when rates rise, the underlying prices of bonds fall. Longer-term issues typically suffer bigger price losses than shorter-term bonds. So in this environment, I think it is prudent to stick with shorter-term bond funds if you choose to put money in a bond fund at all. I would keep the bulk of your money in the stable-value or GIC and reserve just 20% or so of this slice of your portfolio for bond funds. As noted above, I think bond funds are dangerous, but individual bonds are good. Bond funds, in my opinion, absolutely are not. But within your 401(k) all you have access to is funds. So my advice for the next few years in particular is to steer clear of bond funds completely. If your 401(k) offers a GIC (Guaranteed Investment Contract) fund or a stable-value fund-these are other low-risk investments-I prefer them to bond funds. But if you absolutely, positively want to invest in bond funds within your 401(k), please stick with shorter-term funds with average maturities of five years or less. In the coming years I expect interest rates will begin to rise off their current historic lows, and when rates rise, the underlying prices of bonds fall. Longer-term issues typically suffer bigger price losses than shorter-term bonds. So in this environment, I think it is prudent to stick with shorter-term bond funds if you choose to put money in a bond fund at all. I would keep the bulk of your money in the stable-value or GIC and reserve just 20% or so of this slice of your portfolio for bond funds.

5. Rebalance your portfolio once a year Rebalance your portfolio once a year. One of the keys to successful long-term investing is to make sure you don't overload on one hot investment, and by the same token, have too little in an underperforming investment. What's hot today won't be hot forever. What's cold today won't be cold forever. That's why you want to rebalance: By constantly bringing your portfolio back in line with your long-term allocation strategy you are not making any outsize bet for or against any specific part of your portfolio.

Let's say you started the year with 15% of your stock portfolio invested in international stocks and 85% in a U.S. stock fund. But at the end of the year, the international markets did so well, while the U.S. markets lagged, that your mix is now 22% international and 78% U.S. I realize this takes discipline, but you want to shift your money around-you can in fact exchange money from one fund to another within your 401(k) without any tax bill to get back to your target of 8515. It's also important to rebalance your overall stock and bond/cash mix so they stay in line with your long-term allocation strategy. Now, don't go crazy with this; once a year is fine. Or if you're feeling extra motivated, go ahead and rebalance every six months if your allocations are more than 5% off your targets.

That is my best advice on how to build a smart 401(k) portfolio that mixes the opportunity for inflation-beating gains (stocks) with more soothing lower-risk investments.

But I need you to stand in your truth. If, after reading that, you honestly can't see yourself putting in the work to create that portfolio, well, then that is your truth and I will respect it. And I will tell you that your next best option-though inferior, in my opinion-is to choose the target retirement fund in your plan. I would rather you have your money invested in sync with your investment time frame rather than 100% of it sitting in cash, or company stock, or worst of all, you not partic.i.p.ating at all. As I said, a target retirement fund may not be ideal, but if you are uncertain about your ability to choose your allocations and follow up on them once a year, this option might deliver peace of mind. If that is your truth, I can only support you when you choose to stand in it. And the reality is that because you are young, your target fund should have very little committed to bonds; the investment pros at the mutual fund company who are in charge of setting the allocation mix within your target fund know full well that you belong mostly in stocks given all the time you have. However, I will continue to hope that as you age and gain confidence you will take control of the allocation of your 401(k). Once you are in your 40s and 50s a target fund will most definitely invest more in bond funds than when you are in your 20s and 30s. So those later decades are the years when I would ask you to seriously consider stepping up and building your own portfolio so that you do not find yourself stuck in a target fund that is overloaded with bond funds.

THE BEST INVESTMENTS FOR YOUR IRA AND REGULAR TAXABLE ACCOUNTS: ETFS.

For retirement a.s.sets outside your 401(k), you have the freedom to choose among the thousands of investments offered by the discount brokerage you use. That includes mutual funds, individual stocks, and individual bonds, as well as exchange-traded funds (ETFs). I think ETFs are an ideal way to invest the stock portion of your IRA. An ETF is very much like a mutual fund, except its fees tend to be lower. Another benefit is that unlike funds, an ETF's price changes throughout the day to reflect changes in the value of its underlying holdings. A mutual fund, by comparison, has just one price a day, set at the close of business (4 P.M. Eastern). If you place an order to buy or sell a mutual fund at 11 A.M., your price will be based on the closing price at 4 P.M. If a disaster were to happen at noon that day there would be nothing you could do about it; you still would get what the price was at close of business. With an ETF, if you place your trading order at 11 A.M. it will go through immediately and reflect the current price of the ETF at that moment in time. Granted, your long-term retirement funds shouldn't be actively traded on a daily and hourly basis, but I want you to understand the added flexibility you have with ETFs.

One of the big differences between an ETF and a mutual fund is that an ETF trades like a stock, and that means there is a commission to pay each time you buy and sell ETF shares. That's a disadvantage compared to a no-load mutual fund, which does not charge a commission. But one of the most promising developments in 2010 was that some major brokerages including Fidelity, Schwab, TD Ameritrade, and Vanguard decided to eliminate or sharply reduce the commissions charged to buy and sell certain ETFs. For investors who want to invest on a monthly or quarterly basis rather in than one lump sum each year, the prospect of making commission-free trades is great news. Someone who invests monthly and in the past paid a $10 fee for each trade can now save $120 a year through commission-free ETF trades.

The website morningstar.com has a terrific amount of information and data about ETFs. I encourage you to educate yourself before you invest. has a terrific amount of information and data about ETFs. I encourage you to educate yourself before you invest.

Some ETFs I recommend as good choices for building a diversified long-term retirement portfolio: U.S. Stock ETFs - Diversified index ETFs that give you broad exposure to hundreds of U.S. firms - iShares S&P 500 (ticker symbol: IVV) - iShares S&P SmallCap 600 Index (IJR) - iShares S&P MidCap 400 Growth Index (IJK) - Vanguard Total Stock Market (VTI) Diversified International Stock ETFs - Vanguard FTSE All World ex-U.S. ETF (VEU) - iShares MSCI EAFE Index Fund ETF (EFA) BOND INVESTMENTS.

For the bond portion of your IRAs and any taxable accounts, I recommend you invest in individual Treasury bonds. Because these are backed by the U.S. government you do not have to worry about default risk. If you were to invest in corporate bonds you would need to build a diversified portfolio of 10 or more issues, and unless you have $100,000 or more to devote to bonds, the commission you would end up paying would be too expensive.

The discount brokerage where you keep your IRA should offer the ability to buy Treasury securities, or you can invest through TreasuryDirect.gov. Just remember to stick with shorter-term issues-maturities of five years or less.

RETIREMENT PLANNING MISTAKES YOU MUST AVOID.

Now that you know the key steps to investing for retirement, I want to make sure you don't make some costly mistakes along the way.

* Do not use retirement funds to temporarily fix a long-term problem Do not use retirement funds to temporarily fix a long-term problem. There is no more costly mistake than using your retirement savings prematurely, to pay for something other than your retirement. Yet I know that many of you have felt compelled during the past few very rough years to pull money out of your 401(k) or IRA to make up for lost income from a layoff or reduced pay. Many more of you have come to me asking if it is okay to take money out of your retirement accounts so you can keep up with a mortgage payment that is no longer affordable.

My answer: No. It is not okay.

I say that with tremendous heartache for what I know so many of you are going through. But I am here to teach you what is best for your long-term security. And you will not be able to achieve your retirement goals if you spend your retirement savings today.

It is impossible for me to overstate how sensitive I am to the hardships many families are going through because of layoffs and other financial setbacks these days. And I certainly understand the desire to use your retirement funds to help you make ends meet during this difficult time. But I am going to ask you to stand up to a very important truth here: If you withdraw money from your retirement funds today, will you solve a problem for good, or will you just buy yourself a little time? Please answer that question based on what you know for sure today, not what you hope may happen in a month or two or three.

What I see so often is that wonderful, well-intentioned families think they are doing the right thing by taking money out of their retirement funds so they can keep up with a mortgage payment. This helps them for a few months, but then when that money runs out they are once again back at square one: They have a mortgage they can still not afford. Making matters worse, they now also no longer have their retirement savings.

It is important to understand that your retirement funds are protected in the event you ever have to claim bankruptcy. No matter how much you owe, no matter to whom you owe it, no court in this country will ever allow retirement savings held in a 401(k) or IRA to be used to repay your debts. Retirement funds are shielded. And you must understand that if you make an early withdrawal from your 401(k) you will owe income tax and a 10% penalty-if you are younger than 59-on the amount you withdraw. So that reduces the actual amount of the withdrawal you will have left to use, after paying the tax and penalty. And please understand that if you fail to pay the tax and penalty, the IRS has the right to start taking the money you owe directly out of your paycheck.

* Steer clear of 401(k) loans Steer clear of 401(k) loans. So many of you are tempted to take a loan against money you have in your 401(k) plan to pay off other debts. For example, you tell me how smart you were to borrow $5,000 from your 401(k) through a loan that charges a low interest rate, to pay off your $5,000 credit card bill that charges you 20% interest. That's not nearly as smart as you think.

Let me tell you about the payback rules: If you are laid off from a job, or if you decide to take another job, you must repay the loan that is still outstanding quickly, typically within a few months. If you can't afford to do that, the entire amount of the unpaid loan will be added to your taxable income for the year, so not only will you owe tax on that amount, but if you are younger than 55 in that year you will also have a 10% early-withdrawal penalty to pay.

Furthermore, you will end up paying taxes twice on the amount you borrowed. There is another tax drawback to a loan. When you originally invest in a traditional 401(k) it is with pre-tax money. If you then "borrow" that money you will eventually repay it with money you have already paid taxes on. Now let's jump ahead to retirement. The money you repaid with after-tax dollars is now part of the account you have never paid taxes on. And so when you go to withdraw that money in retirement, guess what? It will be treated again as ordinary income. So you've essentially volunteered to pay taxes twice.

* Don't cash out your retirement funds when you leave your job Don't cash out your retirement funds when you leave your job. Another common mistake I see is when people leave a job and they have just a few thousand dollars in their 401(k), so they decide to cash it out, rather than leave it to grow for retirement. This is one of the weaknesses of the 401(k) system: Once you leave an employer, regardless of your age, you are free to do what you want with your account. You can leave it invested at your old employer as long as you have over $5,000 in the 401(k); you can roll it over into an IRA (and convert it to a Roth IRA); and you also have the option to cash it out.

The cash-out option is a mistake that no one at any age can afford to make. Younger adults in their 20s and 30s are typically the most tempted to cash out when they leave a job. I understand what's at play here: You are struggling to make ends meet and you look at your relatively modest 401(k) balance and see a chance to pay some bills, or maybe take a vacation, or upgrade your wardrobe for your next job. I am very sympathetic to how tempting it is to do the cash-out, but it is such a costly mistake. For starters, the money you cash out will be charged the 10% early-withdrawal penalty. Furthermore, if it was invested in a traditional 401(k) you will also owe income tax on the entire amount of the withdrawal. So right there you are walking away with a lot less money.

But it's not just the tax and penalty that makes this a bad move. What I want you to focus on is how you are throwing away decades of compound growth. For anyone around the age of 30 who is considering pulling money out of their 401(k), I want you to always consider the 8x factor: Take the amount of your existing balance and multiply it by 8. That is what your account could grow to by the time you reach age 67, a.s.suming it grows at a compounded 6% annualized rate.

So let's say you have $5,000 in the 401(k) of a former employer. Leave that money invested for retirement and it could be worth more than $43,000 by age 67. I want you to reframe your thinking here. If you withdraw $5,000 today you will probably end up with less than $4,000 after paying the mandatory 10% early-withdrawal penalty and the income tax that is levied on all withdrawals. Or you could leave the $5,000 invested for retirement and possibly have a retirement fund worth more than $40,000. I hope that makes my point crystal clear: There is a potentially huge cost to cashing in a 401(k) when you are young.

WHAT TO DO WITH YOUR 401(K) WHEN YOU LEAVE A JOB.

Instead of cashing out an old 401(k) when you leave a job, I want you to keep the money growing for retirement. If your 401(k) balance is at least $5,000 you typically will have the option of leaving your 401(k) in your former employer's plan. If you know for sure that the 401(k) has great low-cost mutual funds, that can make sense. But I have to say I typically think it is far smarter to do what is known as an IRA rollover. This is a straightforward process where you move your money from the 401(k) into a new IRA account at your discount brokerage or fund company. The advantage of doing this is that, as I explained earlier, you will have the freedom to choose from a wider array of investments once your money is in an IRA, including direct investment in Treasury securities as well as ETFs.

Go to The Cla.s.sroom at www.suzeorman.com:There you'll find information on how to move your money from a 401(k) to an IRA using the direct rollover method.

LESSON RECAP.

Make the commitment to develop a retirement plan in your early years and you will be on your way to a great retirement. I know we have covered a lot of material here, so I want to leave you with a few big-picture goals to focus on: - Start as soon as possible.

- Make it a goal to save 15% of your pre-tax salary.

- Always contribute to a 401(k) that offers a matching contribution and make sure you contribute enough to earn the maximum employer match.

- Include stock mutual funds in your retirement portfolio.

- Contribute to a Roth IRA.

- Keep your retirement money growing for retirement. No early withdrawals or loans.

CLa.s.s.

RETIREMENT PLANNING.

FINE-TUNING IT IN YOUR 40S AND 50S.

THE TRUTH OF THE MATTER.

Your late 40s and your 50s are a critical time for your retirement dreams. Even the most carefully thought out retirement plan likely needs a thorough tune-up as you round the bend of midlife-not only because traditional "retirement age" looms on the horizon, but also because the past few years have thrown a lot of new challenges into our path. Your 401(k) and IRA balances may still be recovering from the recent bear market. The home equity you may have been counting on to fund a large part of your retirement may be well below what you were planning on just five years ago. Or maybe your savings plan was set back due to a job loss in your family.

As unsettling as all of that is, there is still plenty of time to act. The actions and adjustments you make today can have a tremendous impact on the quality of life you will enjoy in retirement. But the reality of this midlife stretch is that it requires an absolutely ruthless truthfulness from you and a resolute determination to be thoroughly candid about your financial situation today today-not what you had 5 or 10 years ago, but right now. I am asking you to take a deep breath, put your fears and anxiety aside for the moment, make an impeccable personal accounting, and then, with my help, make the smartest choices possible based on your current reality. The biggest mistake you can make at this juncture is to sit tight and not act, hoping, praying that somehow between now and retirement everything will work out for the best. That is not standing in your truth. That's the opposite. I'm sorry to break it to you: It's delusional.

I am here to tell you that the choices you make in this decade will have a tremendous impact on whether you will be able to retire with the money and security you desire. It is your willingness to face those decisions today-and adjust your retirement plan as needed-that will allow you a decade from now to look back and say with pride, "I am glad I did," rather than be filled with the regret of "I wish I hadn't." I realize it is easy to be paralyzed by what you think is an insurmountable task, but please listen to me: You are still plenty young and in a position to make sure your retirement dreams can be realized.

Every year the Employee Benefits Research Inst.i.tute (EBRI) publishes its retirement readiness report; it's a detailed statistical look at how many of us are on pace to have enough money in retirement to meet our basic living needs. What grabs the headlines is that nearly one-half of us are currently at risk of not having enough in retirement to pay the basic bills such as housing, food, and utility costs, as well as paying for out-of-pocket healthcare expenses not covered by Medicare and private insurance. But here's what was deeper down in the study: The majority of that group who are at risk are within 20% of having what they need to be okay in retirement. That is, right now they have 80% of the savings and access to retirement income (pensions, Social Security, etc.) that EBRI estimates they will need to support themselves in retirement. Yes, that's a shortfall, but it's not nearly as dire as the headlines would suggest. Stand in your truth at this stage in your life and you can surely close a gap of that size.

For those of you who are more than 20% away, now is not the time to give up. I learned a saying from a teacher many years ago that I have often recalled to help me get through tough times in my life, and it goes like this: Be a warrior and don't turn your back on the battlefield.

Obviously the ability to save more at this juncture is a huge part of the puzzle we need to put together between now and retirement. But it's far from the only piece on the table. Reducing your expenses before you reach retirement is a very important strategic move that is often overlooked. We think we have to save, and save, and then save even more so we can "afford" to retire, yet we don't realize that what we need to save is a function of what we expect our expenses to be in retirement. If you can arrange your financial life so you will have lower expenses in retirement, then you don't need to save as much.

Of course, it is impossible to sit down and do a line-item run-through of what you think your living costs might be 20 or 30 years from now. But there are in fact some obvious big-ticket items we can move off your balance sheet. Pay off your mortgage before you retire and you have just wiped out what for most of us is our largest monthly expense. Another big expense center in your 40s and 50s is college costs. For years I have implored parents not to put paying for college ahead of retirement savings. That's become even more important today. I am not just talking about redirecting money you wanted to put into a college 529 plan into your own retirement accounts. Parents must also not overburden themselves with loans to pay for their children's college costs if it means they will still be paying off those loans in retirement. (In the Family Cla.s.s, I explain a college tuition strategy for parents and children ready to stand in the truth of their New American Dream.) We also need to embrace the changing nature of what it means to be retired. The cla.s.sic notion of retirement is that you walked away from your job sometime around age 6265, never worked another day, and lived for another 10 years or so. But if you retire in your early 60s today, the odds are you will live a lot longer than your grandparents did at the same age. Consider that in 1940 the average life expectancy for a 65-year-old man was just 12 years, meaning that just half of the 65-year-old men in 1940 would still be alive at age 77. Today a 65-year-old man has a life expectancy of 16.7 years. That's four more years of needing to support yourself in retirement. Women's life expectancy has increased from 13.4 years to 19 years over the same stretch. Half of today's 65-year-old women will still be alive into their mid-80s! And I want to make sure you grasp the fact that this means 50% will still be living past past their mid-80s. In fact, among women who are 85 today, their average life expectancy stretches into their 90s! their mid-80s. In fact, among women who are 85 today, their average life expectancy stretches into their 90s!

In terms of how we view our retirement years, the impact of these numbers is really significant. Because our life expectancy has expanded, we must consider stretching our work years beyond the traditional 6265 time frame. Unlike past generations of retirees, many of whom could rely on a lifetime pension annuity from their job, most of us retiring in the coming decades will be relying on our own 401(k) and IRA savings. So it's on us to make the money last longer given the likelihood of our longer life spans.

As I will explain in greater detail in this cla.s.s, devising a strategy for extending your income-earning years through your 60s will help to ensure that your retirement savings can support you throughout your longer life. Don't worry, the advice is not that you must keep working 40-plus hours a week at a high-powered job. The goal will be to find some part-time work that can generate enough current income that it enables you to delay when you start drawing money from Social Security and your own retirement savings, or at the very least reduces what you need to spend of your own savings in your early 60s.

Here are some of the actions to take in your 40s and 50s that we'll cover in great depth in this cla.s.s: - Deciding When It Makes Sense to Pay Off Your Mortgage - Have a Realistic Plan for Working Until Age 6667 - Delay Your Social Security Benefit - Estimate Your Retirement Income: How Are You Doing?

- Saving More, and Investing Strategies in Your 50s - Plan for Long-Term Care Costs LESSON 1. DECIDING WHEN IT MAKES SENSE TO PAY OFF YOUR MORTGAGE DECIDING WHEN IT MAKES SENSE TO PAY OFF YOUR MORTGAGE.

Are you surprised that the first lesson is about paying off your mortgage? You probably expected me to jump into a lecture of how you need to really get serious about saving much more in your 401(k) and IRA. There is no question that continuing to build your retirement savings is important-you will surely need that money to support you in retirement. But at the same time thinking about the savings side of the retirement challenge is only half the picture. What about reducing your expenses? If you have lower living expenses in retirement you will need less savings to cover your needs, right?

In terms of your ongoing monthly expenses, your mortgage is probably your biggest bill. A troubling trend is that more people are still paying off their mortgage in their 60s. To be sure, the vast majority of older homeowners in fact are mortgage-free, but between 1999 and 2007 (the latest year data is available) the percentage of people age 65 and older with a mortgage rose from 24% to 32%. And I am concerned that many of you in your 50s today will still be carrying a mortgage into retirement.

Many of you, over the past few years, wanted to take advantage of low interest rates and refinanced from rates above 6.5% to rates around 5% or lower. While that move made sense financially, for many it also reset the clock on your 30-year mortgage, extending your total payback time. Or maybe you traded up during the housing bubble-complete with a new 30-year mortgage. Or perhaps you decided the time was right to take advantage of some of the bargains to be had out there and you became a homeowner for the first time. All these scenarios point up the fact that we now have a generation of 50-somethings who will still be paying off a mortgage well into their 70s or possibly their 80s, if they stick to their current payment schedule. That could create tremendous financial stress if you are living on a fixed income. You may well find yourself struggling to cover your other costs, to say nothing of having the ability to spend money on the things you dreamed your retirement would hold, such as travel and spending time with-and money on-your grandchildren.

Continuing to carry a mortgage once you stop working puts your retirement dream at risk. That is why I am starting this Money Cla.s.s with a lesson on how to get your mortgage paid off before retirement.

Now, I want to be clear, this strategy only makes sense if you can answer yes to these two essential questions: - Do you absolutely intend to stay in this house forever? If you have any doubts about whether you will continue to live in your house after you retire, I wouldn't rush to pay off the mortgage. If you have any doubts about whether you will continue to live in your house after you retire, I wouldn't rush to pay off the mortgage.