6 Fears That Are Robbing from Your Retirement Fund

Misinformation about investing in your retirement fund can cost you in the long run. Calm your worries by learning fact from fiction and start securing your nest egg now

Fear 1: "I don't have enough spare cash to open a retirement account"

What to do: Start small—even if it’s only $20, take “paying yourself first” as seriously as your rent or mortgage. Start with short-term savings until you have accumulated enough to funnel payments into a retirement account. Many IRAs require at least a $1,000 opening balance, but you can start a 401(k) with less.

Get started: Open a savings account that’s not linked to your checking account (so you’re not tempted to dip into it). Consider online resources such as ingdirect.com. Arrange for the automatic transfer of funds from your checking account. Compare interest rates and fees at ratecatcher.com.

Fear 2: "I have no idea where to invest"

What to do: Open an IRA. You may contribute up to $5,000 ($6,000 if you’re 50 or older) per year to an IRA as long as you or your spouse earns an income. A traditional IRA lets you make deductible contributions with pre-tax money, but you pay tax on withdrawals in retirement. With a Roth IRA, you contribute after-tax money, and you don’t owe tax on withdrawals in retirement. If you can live without the tax break now, opt for a Roth.

Get started: At Vanguard—which offers the lowest operating fees of any investment house—open an IRA for $1,000. The easy-to-navigate website features tools and investment advice, too. Fidelity and T. Rowe Price are two other excellent user-friendly options.

Need more help? Consider a fee-only adviser, who is paid hourly rather than on commission. Expect to pay at least $100 per hour for a one- to two-hour initial session, and plan on checking in at least once a year to make adjustments. To locate a professional near you, go to findanadvisor.napfa.org.

You can open a Roth IRA with no money down (if you enroll in automatic investing) at sharebuilder.com. You pay $4 per transaction, but it’s a small price to fund your retirement from scratch.

Fear 3: "I can’t afford to enroll in my workplace 401(k)"

What to do: Tell yourself you can’t afford to reject free money. Many companies match employees’ 401(k) contributions—which makes these accounts terrific retirement vehicles. You don’t have to put in thousands of dollars every month, however. Start with 2% of your salary, for example; with a 100 percent company match, that savings rate becomes 4%.

Get started: Enroll with your company’s 401(k)coordinator. To learn how deductions will affect your take-home pay, use an online calculator (google “AOL 401(k) paycheck calculator”). Every chance you get—a raise, a lowered cable bill, a paid-off credit card—kick your savings up a notch until you reach your employer’s maximum match (more free money!).

Fear 4: "The stock market is too precarious for me"

What to do: Choose investments for the long haul. Stocks carry more risk than bonds or certificates of deposit, but they also have much higher growth potential. The longer your time horizon, the less market fluctuations are likely to damage your portfolio. Choose a vehicle that syncs with your comfort level.

Get started: Pick one mutual fund and you’re done. Vanguard, T. Rowe Price and Fidelity offer target funds. The asset blend is based on your age and typically becomes more conservative the closer you are to retiring.

Fear 5: "I need to access my money, not lock it away"

What to do: Invest in retirement vehicles you can tap when you need cash. Retirement funds do their job best if you leave them untouched. But if you need to fund a child’s college education, put a down payment on a house, suddenly lose a job or face unexpected medical bills, some retirement accounts are more accessible than others.

Get started: Roth IRAs are the most flexible of any retirement account, allowing you to withdraw your contributions anytime with no penalty (but not the earnings, which would cost you a 10 percent fee plus income tax to extract). If you have owned the account for five years, you can take up to $10,000 including earnings to buy a first home. Many 401(k) plans allow you to borrow up to 50 percent of your invested assets for up to five years (but if you leave your job before paying it back, you owe a 10 percent penalty plus tax on the unpaid amount).

Fear 6: "I’ve heard that investment account fees eat up most of your money"

What to do: Select mutual funds with no sales fees and low operating costs. All funds charge fees to their investors. But the amounts vary greatly. To boost your bottom line, put your money only in no-load funds (which don’t charge a sales commission), and consider only those funds that have an expense ratio—which represents the cost of owning shares—that’s lower than 0.5 percent.

Get started: Check Vanguard. It’s the leader of the pack in terms of low-cost funds—all are no-load, and fees run at 0.23 percent on average. Fidelity and T. Rowe Price offer many low-cost options as well. If you have a retirement account, call to find out the funds’ expense ratio and decide if you should switch to more cost-effective options.