by Archie M. Richards, Jr., CFP^®
June 28, 2004

In preparing for retirement, focus on the four investment factors that are easiest to control, not the one that's hardest.

Here are the five ingredients of investing:

• How soon you start investing money;
  
• How much you invest each time;
  
• How long you continue;
  
• The costs;
  
• The annual returns

Set things straight. Begin putting money aside as soon as possible. Invest as much as you can for as long as you can and use investments with minimum costs.

The returns are important, of course. But if you build the portfolio with diversification and plenty of stocks, let it pretty much take care of itself. More on this below.

Assume that Charlie and Dan each create an investment program. Charlie begins at age 35, investing $150 a month until age 65. His investments incur costs of 1.5 percent per year. They earn 10 percent a year before costs. Charlie ends up with $247,000.

Dan begins at 30 and retires at 70, investing for 40 years instead of 30. (Medical science is developing so rapidly that by the time Dan reaches 70, he'll be considered middle age and feel like a youngster.) He puts in $200 a month instead of $150. His investment costs are only 0.5 percent a year instead of 1.5 percent. The investments earn only 7 percent a year before costs, not 10 percent. But despite the lower returns, Dan ends up with almost twice as much: $456,000.

If Dan lifts his annual returns from 7 to 10 percent, he'll have twice as much again: $1,087,000.

The most important thing: Arrange for your investments to come off the top of your pay. If it's an employer's plan, the company deducts the money. If it's your own investments, direct the mutual fund to deduct the amount directly from your bank account. Make the investments automatic. Money you don't see you won't spend.

Try setting aside $200 a month. That's $9.30 every working day - $1.16 an hour. Skim your investments off the top. As your pay rises, increase the investments.

If your employer matches your contributions to a retirement plan, take advantage. Employer matchings are like picking up $100 bills off the street.

For your own investments, begin with a traditional IRA. The contributions are deductible. For every dollar you put in, Uncle Sam lowers your taxes.

Use Vanguard index mutual funds (800-523-7731). They offer a wide variety with low costs - generally less than 0.5 percent per year.

At first, you'll have only enough money for one fund. Use the Vanguard Total Stock Market Index Fund, which holds over 3000 U.S. stocks.

After accumulating enough to spread the money around, aim at 60% stocks and 40% income-producing funds. The income-producers won't gain as much as the stocks, but they reduce the volatility of the whole, making it easier to ride through bad markets.

Among the 60-percent in stocks, put half into foreign stocks, spread among various regions. As to the U.S. stocks, diversify among large, small, growth, and value stocks. For the 40-percent in income sectors, put half into long-term bonds and the other half into real estate investment trusts.

When any of your funds does particularly well, sell some of it and transfer the money to funds that have performed less well. To avoid short-term capital gains, rebalance only after a year and a day has passed.

Don't sell your stocks just because the market falls. Except for annual rebalancing, the fewer decisions you make, the faster your portfolio will gain.

Concentrate on setting aside as much money as possible for as long as possible, with costs as low as possible. Those are the elements most under your control. Diversify widely in index funds. Then, except for the rebalancing, let them alone.