401(k) Fixes for Every Age

Most retirement accounts are battered and bruised these days, as the financial turbulence of the past year has swallowed the gains of the 2003-07 bull market. Younger investors still have decades to reclaim (and surpass) their previous balances, but the market plunge has been agonizing for investors at the other end of the spectrum. At this point, those nearing retirement desperately need growth to bring their portfolios back to where there were a year ago. At the same time, they're seeking to ensure that their painstakingly built 401(k) and IRA balances won’t deteriorate even more. Regrowing retirement savings will be difficult for any age: Older investors may need to work longer and scale back on their expenses; meanwhile, the younger set may need to invest smarter and save even more money. Here's how to take back control of your retirement at any life stage:

20s. Young people today aren’t likely to get a traditional pension, so retirement is something they'll have to fund themselves. Given often meager paychecks, many in this group are saddled with fixed expenses like rent and health care that compete with retirement funding. Twenty-somethings are also more likely to have student loan debt, credit card debt, and cell phone bills than previous generations.

[See How to Cut Those Budgetbusting "Necessities"]

Young people are best position of their lives to begin saving for retirement. If they can manage to tuck away a few dollars here and there, compounding interest can turn a little into a lot over time. A 25-year-old who begins contributing $5,000 annually to an IRA could potentially accrue $1.6 million by age 70, according to Fidelity calculations that assume a 7 percent annual rate of return. Any employer contributions to retirement accounts are an added bonus. It's also a great time for 20-somethings to take a few chances in their retirement accounts because there’s plenty of time to ride out market swoons. “You can take the most risk at 25, because even if the stock market falls down, things will bounce back,” says Eric Hayden, a finance professor at the University of Massachusetts at Boston's business school. When it comes to finance, the biggest risk young people take is failing to save for retirement.

30s. Many retirement experts say the current financial climate presents an opportunity for investors - especially those with more discretionary income - to buy into the stock market at bargain prices. “A young individual essentially can make up for losses with new savings relatively quickly, whereas an older person doesn’t have time to make up for large losses with new savings,” says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute (EBRI). But if you can’t stomach the possibility of a steep stock market drop, begin building a diversified portfolio that can weather any market condition - one that includes stocks, bonds, and even some cash. “If you want to keep your financial life simple, a target-date retirement fund can be a great choice,” says Manisha Thakor, co-author of On My Own Two Feet: A Modern Girl's Guide to Personal Finance. Target-date funds automatically provide age-appropriate investments that grow more conservative as you approach retirement.

[See Making a Million by Age 30]

40s. It’s important to find a balance between preserving the savings you've already accrued and continuing to grow your nest egg. A common rule of thumb in selecting an age-appropriate asset allocation is to subtract your age from 110 and allocate that percentage to stocks. That means a 45-year-old would have 65 percent of their retirement funds in the stock market. Other investors might choose a more conservative 50-50 split between stocks and bonds because of the steady returns bonds provide. Once you determine a level of risk that's appropriate for you, rebalance your portfolio at least once a year to make sure you’re not taking on more (or less) risk than you can handle. Minimizing 401(k) fees will help your nest egg grow faster. Be sure to set up an emergency fund outside of your retirement savings for things like an unexpected medical bill or job loss. That way, you'll avoid dipping into your retirement savings.

50s. Many mid-career employees experienced sharp 401(k) declines over the past year. Those between the ages of 45 and 54 with at least five years on the job saw their account balance drop between 18 and 26 percent, on average, according to EBRI. To correct this, direct any raises you receive into retirement accounts, and step up contributions whenever possible. While all retirement savers can contribute up to $16,500 to their traditional 401(k) in 2009, those age 50 and older whose employers allow catch-up contributions can tax defer as much as $22,000 this year. Contributing an extra $5,500 each year after age 50 will lower your tax bill in the current year, which is especially important now that you're in your peak earning years. It also allows you to defer those taxes until retirement, when you'll likely be in a lower tax bracket.

[See how your 401(k) stacked up in 2008]

60s. The timing of the recession couldn’t be worse for baby boomers rapidly approaching retirement age. Employees between the ages of 55 and 64 - with 20 to 29 years on the job - experienced an average 25 percent loss in their 401(k)s last year, according to EBRI. Many baby boomers are considering delaying retirement until their financial situation improves. In fact, the most important retirement decision you make during this decade of your life is when to retire. “You should be looking at a retirement age between 66 and 70, not between 62 and 65,” says Michael Kresh, a certified financial planner in Islandia, N.Y. and the author of You Can Afford to Retire. It could take an extra year and nine months on the job to bring your portfolio balance back up to where it was a year ago, according to calculations by Jack VanDerhei, research director of the Employee Benefit Research Institute, and two years and one month if people in this group move to more conservative investments. Social Security payouts also increase by approximately 7 to 8 percent for each year you delay claiming between age 62 and 70. That’s a better return than most people are getting in the stock market right now.

70s. Seniors who are already retired have few options to recoup market losses. Still, there are financial strategies you can employ to make the most of what you have left. A prudent way to preserve your retirement stash is to draw down your assets by approximately 4 percent annually. Withdrawing more than 5 percent in a single year could deplete assets too quickly. Cutting expenses as much as possible to allow your assets more time recover can also help get your accounts back up to par. Those who can get by without tapping their retirement accounts won’t be required to make withdrawals from depleted 401(k)'s, IRAs, and 401(b)s this year. The Worker, Retiree, and Employer Recovery Act temporarily suspends an excise tax levied on seniors over age 70½ who fail to take a required minimum distribution from their retirement accounts in 2009.

In recent years, some financial advisers recommended that retirees maintain significant exposure to stocks in order to avoid outliving their assets. But investors who followed this advice are now suffering the steepest losses. Other retirees choose the opposite extreme and pull all their money out of the stock market. That strategy could put you at risk for running out of money too soon. “You should be a little bit more conservative than someone who is 40, but you need to have at least some exposure to the equity market, because that money has to last for 30 years and beat inflation,” says Kresh. To minimize risks, you should also keep a significant stash outside the stock market entirely. “You should have three years' worth of your non-discretionary expenses in cash, CDs - things that are not subject to any risk at all,” says Kresh. “If you are really nervous maybe as much as five years.”

[Find out how the size of your nest egg compares to your peers.]