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Asking the right questions about retirement

"How's the market doing?" is not the right question for those trying to plan for retirement, because it is a very short-term perspective on a long-term issue. Here are some better questions, according to the Employee Benefit Research Institute:

Will I have enough to live on when I stop working? Surveys show that people generally need at least 70 percent of the income they had while working. Social Security is just a base. Will there be enough other income to make up the difference?

Will I have an adequate income for as long as I live? Those who retire with a substantial sum of cash face a variety of challenges. Unless they buy an annuity (putting the inflation protection question aside for the moment), they face a real risk of running out of money before they run out of time. There's a real problem with those who deplete their capital too rapidly - providing them with an adequate income from, say, ages 65 to 75, but then finding that there's little left. At that point, their options for working to earn extra money tend to be limited.

Are my investments appropriate for my status and goal? Those nearing retirement should be more interested in the preservation of capital than in taking the risks required for big potential gains. Those who put their money in a moneymarket fund are protected against loss, but face a real possibility of failing to accumulate enough capital because of low returns. The challenge lies in finding a balance that is prudent and comfortable.

Can I resist short-term temptation to implement a long-term plan? Too often we hear of people who celebrate their move to a new job by liquidating their 401(k) plans rather than rolling them over. The result is a new car or boat today and a retirement income shortfall tomorrow.

Am I behaving in a prudent fashion? That's one focus today. There's nothing wrong with investing in stocks. The returns over time are good. And there's nothing inherently wrong with any particular stock. But there's a danger if you invest solely in stocks (see current markets) and a big danger if you invest solely in one stock (see Enron). Diversification is one of the basic tenets of retirement investing.

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