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What you can do as your 401(k) shrinks

The Baltimore Sun

With retirement near, it's no laughing matter that many a baby boomer's 401(k) has turned into a 201(k).

The stock market has dropped sharply this year, taking retirement dreams along with it. And because of the credit crisis and Wall Street's dastardly deeds with mortgage-related bonds, some bond funds have failed to provide a safety cushion.

www.bankrate.com/brm/calculat ors/retirement/401k_contribution_calculator.asp.

Pay down debt:

You need more money in savings at retirement if you plan to make payments on a mortgage and haven't paid off your credit card debt. Going into retirement with debt is landing retirees in trouble.

Position yourself for retirement by paying off your mortgage and other debt. This can be especially attractive for people afraid to invest money now. Paying off a mortgage charging you 7 percent interest is like earning 7 percent on your investments. And it's a sure thing. A 7 percent return exceeds what you could earn on a safe 10-year U.S. Treasury note or CD.

To understand the impact of paying down credit card debt, see http://partners.leadfusion.com/tools/kiplinger/card04/tool.fcs.

Let Uncle Sam help you:

Your future doesn't depend entirely on the heavy lifting that comes from more saving.

Putting money into the right accounts, and then withdrawing it during retirement so you don't increase your tax bill, can allow you to stretch savings further. Authors Laurence Kotlikoff and Scott Burns say most people can benefit most from the tax system by saving 40 percent of their retirement money in a traditional 401(k) and 60 percent in a Roth IRA or Roth 401(k).

In addition, delay taking Social Security. Each year you wait after age 62 causes your Social Security benefit to be increased 7 percent. Many people are focused on dependable money. Kotlikoff suggests Treasury inflation-protected securities - known as TIPS - and putting some savings into a low-cost fixed annuity that has inflation protection.

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