Rule 1: Pay yourself first.

Many investment professionals start their preretirement pep talk with the same three words: “Pay yourself first.” This includes contributing the maximum amount possible to your 401(k) plan and investing additional amounts in IRAs and mutual funds through automatic payroll deductions.

Automatic investment plans are an easy way to stick with a retirement investing program because the money is invested before it can get spent on anything else. While automatic investing does not guarantee a profit or protect against a loss in declining markets, it does make retirement investing a priority. With any automatic investing program, you should, of course, consider your financial ability to continue to invest through periods of low prices.

Rule 2: Don’t let today’s bills sink Tomorrow’s needs.

Supporting yourself and your family isn’t easy. Chances are, especially if you have children, your household expenses will grow over time. That’s why it’s important, particularly through times of difficulty and new expenses, to keep contributing toward your retirement.

When you consider reducing or ceasing investing for your future in order to cover current expenses, stop, think, and try to find another way to cover your expenses.

Rule 3: Put time on your side.

When you give your money more time to accumulate, the earnings on your investments—and the annual compounding of those earnings—can make a big difference in your final return. Consider a hypothetical investor who saved $2,000 per year for 10 years, then didn’t add to her nest egg for the next 10 years. She has $48,341 after 20 years, assuming she earned 6 percent annually in a tax-deferred account. Another hypothetical investor waited 10 years, then tried to make up for lost time by investing $3,000 annually for the next 10 years. Even though he invested more—$30,000 versus the early bird’s $20,000—he still ends up with a smaller nest egg. Assuming he also earns 6 percent per year, his final account value is only $45,313. Most of the procrastinator’s nest egg—66 percent—is the principal he invested. The majority of the early bird’s account—59 percent—is earnings.

Rule 4: Don’t count on Social Security.

Although politicians consistently tell us that Social Security isn’t going anywhere, it’s still very likely, especially if you are under age 50, that the program will be very different from its current form when you retire.

According to the Social Security Administration, Social Security benefits represent 38 percent of income for Americans over age 65. The remaining income comes predominantly from pensions and investments. The administration also states that by 2030 there will be twice as many elderly Americans as today, growing to 70 million from 35 million. The dollars and cents result of this growth is hard to determine, but it is clear that investing for retirement is a prudent course of action.

Rule 5: Resist borrowing from your 401(k).

Loans are a popular feature of 401(k) plans. People like being able to get access to their money. But many investment professionals recommend that clients consider borrowing from other sources, such as the equity in one’s home, before taking a 401(k) loan. Here are some reasons why.

Fixed return. When you pay yourself interest when you pay back a 401(k) loan, your interest rate is the amount you earn on that money. This may be a modest return compared to what your money could earn if you left it invested in the financial markets.

Payback challenge. Repaying a 401(k) loan when trying to maintain contributions may be difficult. There is a real chance that your retirement plans may suffer when you try to repay and continue to invest simultaneously.

Tax penalties. Switching jobs before a 401(k) loan is repaid can bring unwanted tax consequences. You may be able to pay off or transfer your loan to your new employer’s plan, but if neither option is available, your loan balance will be considered a distribution from your plan. As a result, you may owe ordinary income taxes and a premature distribution penalty tax of 10 percent unless you meet one of the age or systematic payout method exemptions provided in the Internal Revenue Code.

Double taxation. The money you use to pay interest on your loan will be taxed twice. It will be taxed first when you are repaying the loan because, even though you can contribute to a 401(k) with pretax dollars, you can’t do the same with loan payments. It will be taxed a second time, as other 401(k) earnings are, when you make withdrawals from your account in retirement.

Rule 6: Don’t cash out retirement plans when switching jobs.

When you leave a job, the vested benefits in your retirement plans are an enticing source of money. It may be difficult to resist the urge to take that money as cash, particularly if retirement is many years away. But generally you will have to pay federal income taxes, state income taxes, and a 10 percent penalty if you’re under age 55. This can cut into your investments significantly. In Maryland, for example, with its 7.5 percent state income tax, someone in the 25 percent federal tax bracket would lose 42.5 percent of the amount they took.

25.0 percent (federal tax) + 7.5 percent (state tax) + 10.0 percent (penalty) = 42.5 percent

When changing jobs, generally you have three options for leaving your retirement money invested. You can keep the money in your old employer’s plan, roll it over into an IRA, or transfer it to your new employer’s plan if that plan accepts rollovers. Learn more about these three options before deciding which will work best for you.

Rule 7: Take advantage of your IRA options.

The Roth IRA has become a popular way to expand retirement investing for many investors. But with many IRA options available today, it’s important to know why you are investing before you determine where to start. Once you decide on a direction, it’s important to make your annual contribution. Annual contribution limits recently have increased, making IRAs a more valuable method  to invest for retirement. Your investment professional can help you determine which IRA will work best for you.

Rule 8: Compare the merits of the Roth IRA and a 401(k) plan.

The variety of retirement savings options available today is a boon for investors, but the range of choices can also be confusing. Many investors are trying to compare the potential advantages of the Roth IRA with their 401(k) or other type of defined contribution plan at work. The choice is especially difficult for those with limited budgets who can afford to invest in only one option. Work with your investment professional to determine whether the Roth IRA or your 401(k) offers more advantages for you. The answer will depend on many factors, including how many years you have left until retirement, your tax bracket, and whether your employer matches contributions to your 401(k).

Rule 9: Don’t try to time the stock market.

Some investors, even those for whom retirement is still years away, frequently shift their money in and out of the stock market. They’ll get out when they fear a crash and get back in when they expect a boom.

The problem with trying to time the market is that no one can consistently predict the short-term events that push the market up or down. It’s better to have an investing plan adjusted for your goals, time frame, and risk tolerance that diversifies your investments, allocates them among different asset classes, and rebalances your portfolio.

Rule 10: Allocate, diversify, and rebalance.

You have certain long-term financial goals in mind. You also have a certain tolerance for risk when it comes to investing your money. Asset allocation can help you find and maintain your balancing point, so you can pursue your goals at a risk level you find comfortable. As part of a disciplined diversification investment strategy, asset allocation enables you to seamlessly follow this proven three-step process.

Allocate your assets across the major asset classes—stocks, bonds, and cash—to help you pursue the optimal returns for the risk level you’re willing to undertake.

Diversify within each class to take advantage of different investment styles—such as growth and value stocks—and various market sectors—such as government and corporate bonds.

Rebalance your portfolio regularly. Market activity can shift the percentages of your portfolio that you have dedicated to each asset class. Rebalancing will help you maintain your desired allocation. DW

Information for this story was provided by MFS Investment Management. Gail Perry-Mason is a financial coach and co-author of Girl, Make Your Money Grow! For more information, visit www.gailperrymason.net.

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1. Debunking Investment Myths

Despite the trend toward longevity, you and your siblings should talk with your parents about their financial future, even if they are only in their sixties. These discussions should cover, at minimum, long-range housing options, long-term care insurance, and wills and living wills. “Frequently, the first conversation happens when there’s a crisis,” says Elinor Ginzler, author of Caring for Your Parents: The Complete Family Guide. “By then, people are tired, physically and emotionally—and possibly financially,” she emphasizes.

Talking to mom and dad now allows them to be in control. It also gives the whole family time to research options and costs under calm circumstances. For example, when it comes to determining whether or not to go ahead with life-support, knowing their preferences—and having them in writing—will diminish some of the stress and conflicts about key decisions.

Here are some things to consider with

Types of Living Situations

Planned Communities
Also known as active adult communities, these are often amenity-rich residential developments for independent people with common interests. Avid golfers, for instance, get to enjoy life within walking distance of a course and in the company of equally passionate neighbors. Planned communities may impose age and visitor restrictions, for example, limiting a guest under 18 to a one-week stay, so be sure to ask about the regulations. Because Medicare considers planned communities a residential choice and not a medical necessity, it will not cover the cost.

Continuing Care Retirement Facilities
These facilities offer a continuum of care: generally independent living, assisted living, and nursing home care, often on one campus. Their size can range widely, from those that house several residents to those that care for hundreds. Before choosing a facility for a loved one, make sure to arrange tours of several different
facilities, as they can vary widely in quality, cost, and services offered.

Generally, continuing care facilities offer the following:

Independent Living
Independent living is for those who are able to live on their own but do not want to maintain a home, condo, or apartment. These facilities often offer a range of activities and trips, and sometimes group meals.

Assisted Living
An assisted living facility is for people who need help with activities of daily living, such as cooking, bathing, and dressing themselves. Although services include skilled nurses and sometimes hospice care, Medicare won’t foot the bill, which averages nearly $36,000 a year ($51,000 if the patient has Alzheimer’s or dementia). However, some states might cover the fees through Medicaid if income guidelines are met.

Nursing Homes
Of all the options you’ll come across in your search, nursing homes are the most widespread. State funds usually pay for a portion of the $69,000 annual cost of housing a patient in a semiprivate room. These are places where physically impaired or mentally disabled adults get medical attention and comprehensive services. One thing to keep in mind is that Medicare covers only short-term stays (say, several weeks to heal from a fractured hip), but Medicaid pays for extended nursing home care in some states if your parent is eligible.

Long-term Care Insurance
Getting long-term care insurance for a person already in his or her 70s or 80s can be difficult. Today, the average
premium for adults over 65 is an astronomical $2,862 a month. On the other hand, the premium for someone under 65 is about $1,337 a month (depending on your age, now might be a good time to get a policy for yourself). Regardless of who the plan covers, ask for inflation protection, which is a built-in safeguard for the rise in care costs. Most important, be sure you are clear on what is and what is not covered—and whether certain conditions need to be met. For instance, some policies cover planned communities and assisted living facilities, not just nursing homes. Some policies can be used only if a doctor hired by the insurance company determines that you actually need the service. Experts recommend asking a lawyer to review the policy.

Wills and Living Wills
Your parents will need a will or a trust so that their assets are distributed according to their wishes, not the state’s. Although you can help them compose a will or trust, you should hire a lawyer to make sure the will adheres to the laws of your parents’ state of residence. Make sure you know where the will or trust is kept and that it is updated as necessary to accommodate changes in assets or family members and to remove deceased relatives.

A living will is a document that tells doctors how to proceed if a patient falls into a vegetative or terminally ill state. These are tough issues to think about—and even more difficult to go through—but knowing whether your parents want surgery or blood transfusions or to be fed intravenously or to use a ventilator or heart-lung machine eliminates some of the conflict when making these heart-wrenching decisions.

As difficult as these matters are, if you deal with them now, when your parents are healthy, it is much easier than having to play catch-up after one falls ill. Putting a plan in place will not only ensure that your parents’ needs are provided for, it will also provide peace of mind. DW

Jennifer Alaya is a freelance business and finance writer based in New York.

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Would you buy a criminal an HDTV or a house? My guess is no. Unfortunately, last year 8.4 million people like you and me became victims of identity theft, unknowingly funding a con’s appetite for gadgetry, exotic trips, and even a high-priced home. In some cases, the delinquency stretched beyond what victims might find on a credit report: some are shocked to discover that, in addition to the financial fraud, criminal charges are posted under their names. What’s more, undoing all this takes a huge amount of time. So what can you do?

Protect your social security number. It may not be the secret formula for Coca-Cola, but your social security number should be well guarded. Avoid carrying it in your wallet or writing it on checks. And ask any company, such as your health insurer, that uses your social security number as an identifier on printed material to replace it with another number. When someone wants to know your number, ask why it is needed and how it will be protected.

Shred trash and keep mail private. Luckily, shredding anything that might help a thief open accounts—such as financial and health documents, and including expired credit cards—will keep identity stalkers away. Drop outgoing mail at a post office rather than put it in an unsecured mailbox. If you go on vacation or away on business, ask the post office to hold your correspondence.

Verify the source before sharing information. Some victims thought their bank’s service rep was on the phone and disclosed vital information. Little did they know they were speaking to a criminal. As a rule of thumb, never give out personal information over the phone, on the Internet, or in the mail unless you originated the contact.

Select intricate passwords. Place passwords on all accounts that allow you to do so—and get as creative as you can. That means your mother’s maiden name, your birth date, the last four digits of your Social Security number, your phone number, and even any word that appears in the dictionary are off-limits. The best passwords use combinations of letters, numbers, and special characters.

Store information in secure locations. What it boils down to, sadly, is that you’re likely to know the person who steals your identity. So keep your personal information in a secure place at home. At work, make sure your purse and wallet are stored safely.

Mind your credit report. When it comes to yearly checkups, you can add your credit report to the list. You are entitled to a free copy every year at www.annualcreditreport.com. This line of defense will turn up information on all accounts, from the newly opened to the long established. Mysterious inquiries from sources you don’t know should raise a red flag.

Identity thieves are getting smarter every day—but if you follow these steps, you’ll go a long way toward keeping your financial identity your own. DW

Jenny Mero is a reporter at Fortune and a contributing writer for several publications, including Essence and elecciones.

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During her residency, Dr. Desai didn’t earn much money, but she did manage to accumulate some funds. After she finished her residency, she continued to add to her savings. But she wasn’t getting anywhere. As she puts it, “What advisor wants to work with someone who has far less than $100,000, let alone $250,000, to invest? Will anyone even talk to me?” Fortunately, Dr. Desai was soon debunking one of the key investing myths: her attorney referred her to Robert Haley, a financial professional with Portland’s Advanced Wealth Management.

What are these investing myths? There are many, but here are half a dozen that come up again and again.

Myth #1
Financial Professionals Demand Big Bucks

As Dr. Desai found out, a referral is key to getting “in” with a top financial professional, especially if you have well under the official “minimum” of investable assets.

Certified financial planner Linda Rhea, past president of the Colorado Society of Certified Financial Planners, is a big fan of referrals. According to Rhea, “Some of the top money managers in the country will say their minimum account size is $250,000, but if you are referred to their firm, they will almost always waive their minimum. Robert Haley agrees, emphasizing, “I don’t require a minimum [when the client is from a referral source] because it is more important to cultivate the centers of influence—the attorneys, accountants, and others—who make these referrals.”

If you want to work with the best financial professionals, ask for referrals. As Dr. Desai points out, “I would be in a very different place today [five years later] if I hadn’t been referred to Bob [Haley].”

Myth #2
Stocks Deliver Better Returns Than Mutual Funds

Many would-be investors believe stocks are the way to go for the best rate of return. But as Haley points out, “You need at least 40 different stocks to spread your risk.” Mutual funds offer built-in diversification—a primary way to reduce risk. Haley believes holding individual stocks is the better method for keeping control over your taxes, however, because you can sell at any time to take gains or losses. But he offers exchange-traded funds (ETFs) as a way to have the best of both worlds, since ETFs also allow you to choose when you sell or buy.

Mutual funds can be an excellent vehicle for retirement savings because current taxes are not an issue. ETFs, which are a form of index fund that is actively managed, give you more control than mutual funds over managing tax risk (the low costs/turnover affords a large measure of control over capital gains taxes).

Myth #3
Only Older People Should Invest in Bonds

Bonds are an essential part of almost everyone’s portfolio. They tend to balance out the volatility of the stock market, creating a reliable rate of return to offset some of the market’s ups and downs.

Camilla Neri of Retirement Capital Strategies in San Jose, California, specializes in working with female executives, professionals, and business owners. In her opinion, choosing the right mix of bonds, CDs, and stock-based investments is “a balancing act.” She says, “Your investment allocation has to reflect your level of comfort with volatility while meeting your goals and desired rate of return.” Bonds alone won’t do this, but neither will stocks, mutual funds, nor ETFs.

Most financial professionals recommend that you put at least a portion of your portfolio into bonds or other investments with a fixed rate of return. To take advantage of tax deferral and to reduce the impact of future taxes on retirement accounts (in which the tax-deferred contributions and growth will be taxed at income tax rates), it makes sense to put bonds into retirement accounts and stock-based investments in non-retirement accounts. This, along with other planning techniques, can lead to “tax efficiency.”

Myth #4
Pay Off Your Mortgage

Frank Bearden, an ethics specialist in San Antonio, Texas, was in the oil business in Oklahoma during a “bust” cycle in the oil patch. That’s when he realized that cash has value beyond the face amount of the actual bill. “People had ‘piles of cash’ and sunk it into their houses. Then the bottom dropped out of the [housing] market.” That cash lost value fast.

Today’s shaky real estate market and imploding mortgage industry are like “déjà vu all over again.” Equity is vanishing and mortgages are exceeding the value of many people’s houses.

Residential real estate has a clear purpose: a place to live. But expecting your home to fund your retirement can lead to bitter disappointment. Planning on continually rising values to offset taking out a subprime mortgage is risky. And pouring money into real estate at the expense of building retirement and nonretirement assets can be a recipe for disaster.

Myth #5
Investing Can Wait

When it comes to building and growing your investments, there is no time like the present. Here’s a table to show you the high cost of delaying investing for five years.

As you can see, the cost of waiting just five years can be incredibly high. And if you are missing out on “free” money, such as an employer match to your company-sponsored retirement plan, the cost is even higher.

Myth #6
Retirement-Plan Money Is Locked Up

As the table in Myth #5 shows, in 15 to 25 years you can amass a significant amount of money. If this money is inside a traditional 401(k), 403(b), or tax-deferred individual retirement account (IRA), you can actually get to it before you turn 59 1/2, thanks to section 72(t) of the Internal Revenue Service Code, which allows you to take “substantially equal payments for five years or until you turn 59 1/2, whichever is longer.” As long as you pay the taxes due, there is no 10 percent penalty.

So, if you had $2 million at age 50 and wanted to retire and tap the funds, you could take between roughly $7,300 and $10,500 per month if you began withdrawals in 2008.

The Wrap
Your options are many. And the myths are just that—myths. Financial professionals want to work with you, especially if you are referred to them by a member of their network.

The cost of waiting is high. The time to start is now.

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