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Take 3 easy steps to a richer retirement

TODAY Financial Editor Jean Chatzky shares smart advice on how you can protect your 401K.
/ Source: TODAY

In a recent poll on our sister site, 86 percent of people responding said they take full advantage of the match offered by their company's retirement plan. With so much hanging on that one big investment, all the stock market's ups and downs leave many people wondering how they can protect their money.

The volatile market has countless people scared — there are many people who do try to time the market, but not to their advantage.  Even pros who try to time the market get it wrong all the time, and trying to time/predict the Federal Reserve and its impact ON the market is no easier. Here's proof:

If you look at the S&P 500 for the 20 years ending Dec 2003, you'll see that the average rate of return over the period was 10 percent.  But if you miss the:- best 10 days avg. return = 7.1%- best 20 days avg. return = 5.03% - best 40 days avg. return = 1.60%

you might as well have parked the money in a plain-vanilla savings account.

So what is the solution? An approach that makes sense when the market is doing well — and when it's not doing so well. TODAY Financial editor Jean Chatzky shares three smart tips on how to protect your nest egg:1) Invest in a mix of stocks, bonds, cash
Figure out what percentage of your assets belong in stocks, bonds and cash. A couple in their 30s like this one should have about 70 percent of their money in a diversified stock portfolio — that means large cap as well as small cap, growth as well as value, domestic as well as international.  They are —as you can see from the chart below — investing more like a couple either in or headed into retirement. That's not going to give their money enough of a shot to capture any real growth in the stock market.

Allocation rule of thumb
100 minus your age = % you should have in stock

Sample Asset Allocations
20s: 80 percent stocks, 20 percent bonds30s: 70 percent stocks, 30 percent bonds40s: 60 percent stocks, 40 percent bonds50s: 50 percent stocks, 50 percent bonds60s: 40 percent stocks, 60 percent bonds70s: 30 percent stocks, 70 percent bonds

If you pick the funds in your retirement account yourself, like Raphael and Kristel did, then it's your job to be sure that your allocations stay in balance.  When the stock market makes a big move up, you'd likely find yourself owning a greater percentage of stocks. When it heads down, you'd likely find yourself owning a greater percentage of bonds — even if you'd done nothing, made no changes. So twice a year you need to go back and "rebalance" your portfolio. Sell what you need — stocks or bonds — to bring those asset allocations back to where you want them to be. It's tough to sell investments that are going up, but if more people had rebalanced in the middle of the dot-com boom, fewer people would have lost their shirts when it popped.

If this is too much for you ...

2) Buy a fund that rebalances automatically
Look into an option called a Target Date Retirement Fund. These are also called Life-Cycle Mutual Funds and, according to some recent research by the profit-sharing/401(k) Council of America, 49 percent of retirement plans now offer them. These are mutual funds that rebalance themselves toward your expected retirement date. You pick a fund that coincides with when you expect to retire (2030, 2035, etc.). The manager of that fund takes fewer and fewer risks with the money as the fund closes in on that date, so that if stocks take a turn for the worse just before you retire, you won't feel nearly as much pain. If you go this route, you don't ever have to rebalance.

3) Invest a little more each year
One other problem with retirement accounts is that people select a percentage to contribute (to have pulled out of their paychecks automatically) and then they don't adjust that percentage upward as they start making more money. A recent change in the law (The Pension Protection Act of 2006) allows the company you work for to automatically take your percentage up by a little bit each year as long as you keep investing until you reach the maximum you're allowed to invest (maxxed out). Now, not all companies are doing this. But if yours is, you should either take advantage of it, or make a commitment to increasing your own contribution once a year until you are maxxed out.

Still can't sleep?
If you're truly upset by all the volatility in the market, a few suggestions.

  • Stop watching. Really. If you put your portfolio on autopilot, there is no need to check it daily or even weekly. 
  • Move 5 percent of your stocks into bonds, and see if that calms you down. If it doesn't, take 10 percent.

With reporting by Arielle McGowen.

Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .