MILLIONS MADE SIMPLE

Take five steps, retire rich. Our in-house financial guru shows you the way

By Ben Stein, Photographs by Ture Lillegraven, Posted Date: March 12, 2007

When I was in junior high school, I was bullied by two large, nasty kids. I took up weight lifting to make myself stronger. It was boring and tedious, but it worked, and I was never bullied again by those creeps. You're probably too old to be bullied by eighth graders, unless you have children. But you will surely be pushed around by two thugs who are far harder to deal with: financial insecurity and its evil brother, retirement insecurity.

It's my job, as I approach my 63rd birthday, to help you bulk yourselves up so you will not be saddled with fear--or, worse, a bad financial plan. When I started lifting, I was told by my mentors in the gym that if I took it slow, I would get there. Likewise, we're going to take it slow. But if you execute this five-step plan, you'll reach financial nirvana.

Step 1 : Figure out how much you'll need to retire.

There's no one-size-fits-all answer to the "how much" question except "more than you think." As a general guideline, you'll need 90 percent of your preretirement income until age 80. If you're 30, your pre-inflation salary will roughly double by the time you reach 65, thanks to your increased productivity and seniority. (If you're in a field like law or finance, it may rise even more than that.) Then, the effects of inflation will probably triple that figure during that time.

So, if you're 30 and you're earning $50,000 a year now, it's quite possible that by the time you reach your mid-60s, your salary will have reached $300,000. To live comfortably after retirement, you're going to need about $270,000 a year for 15 years. Or, slightly more than $4 million. That seems like a lot now. It won't then.

Step 2 : Determine how you'll amass that kind of dough.

There are dozens of retirement calculators online that can tell you exactly how much you'll need to save each year to reach your goal. One of my favorites, because it's so simple, can be found at retireonyourterms.org. Plug in how much you make and how much you've saved, and it'll tell you if you're on track.

But remember: The earlier you start saving, the easier it'll be to reach your goal. If you're in your 20s or early 30s and not saving at least 10 percent of your pretax income already -- putting it into a 401(k) or IRA—you should increase your contributions, like, today.

Step 3 : Pick your investments.

The key? Keep it simple. Few investors can beat the overall stock market by choosing individual stocks, so don't bother trying. In fact, few Wall Streeters can beat the market for more than a few years in a row.

I like index funds—mutual funds that approximate the return of the total stock market. Vanguard and Fidelity, the big 401(k) managers, both offer them. So do other companies. Total index funds keep you well-diversified among large, middle, and small-company stocks. They're a solid, unexciting choice. Which means they're perfect.

Another good option: a mutual fund that tracks the S&P 500, or the 500 largest companies in America. It's a slightly less risky choice because of the large-company focus, but the potential for gains isn't as great, either.

A third option is a fund that mimics the Dow Jones Industrial Average, which tracks 30 of the largest companies in the country, from General Electric to Citigroup. These stocks tend to fluctuate less than the overall market, and they pay pretty nice dividends.

You can buy the Dow 30 in an exchange-traded fund, which is like a mutual fund but is traded in real time, like a stock. One major benefit is that the management fees are far less than those of most mutual funds. For more info about exchange-traded funds, go to ishares.com.

Step 4 : Diversify internationally.

You should invest roughly a third of your money in foreign stocks. But again, avoid individual stocks. Pick an index fund that tracks large foreign stocks in Europe, Asia, and Australia, such as the MSCI EAFE index.

You might also want some exposure to less-developed nations, such as China, India, Brazil, and Russia--these economies still have plenty of room to grow. If so, purchase a fund that tracks indexes, like the MSCI Emerging Markets Index or the Bank of New York Emerging Markets 50 ADR Index. You'll also find more information about these international investments at ishares.com.

Step 5 : Forget about it.

A century or so ago, the great investor J.P. Morgan was asked to predict the future of the stock market. His answer was "It will fluctuate." The portfolio I outline above will fluctuate. But over years, if history holds, your portfolio will rise 8 percent or so per year. That means it'll double every 9 years, and that's not bad at all.

Some years, of course, it will go down. When that happens, keep on buying. Some years, it will go up a lot more than 8 percent. Keep on buying. When the commentators on TV say we're heading into a period of staggering inflation, keep on buying. When the pooh-bahs of Wall Street say the market's way overpriced, keep on buying.

Over decades, broad indexes of stocks outperform real estate, bonds, and cash. They outperform art and coins and gold. Just keep buying. Put it on autopilot. Have the investments debited automatically from your paycheck or checking account. Just keep buying.

Don't worry about billionaires and their hedge funds. Don't worry about oil speculators or penny stocks. Just keep saving in those broad indexes and you'll get there. It's not exciting, but then neither is lifting weights. But pretty soon, the specter of financial insecurity will look as pathetic and puny as an eighth-grade bully.

You can do it yourself. But only if you start doing it now.