Know Your Comfort Level for Risk

All investments other than a bank account or other cash-equivalent investments will fluctuate in value, some more so than others. When devising an investment plan, honestly evaluate your comfort level with risk. If you will panic at sharp losses, don't buy more volatile investments, such as stocks and bonds. The reason is simple: if you lose your nerve when markets take a big drop and sell your investments, you'll do much worse than if you had invested more conservatively in the first place.

Take Advantage of Tax-Advantaged Investments

401(k) plans, 403(b) plans, Keoghs, IRAs, and SEP-IRAs allow you to defer income tax on money you put aside for retirement. In addition to investing money that would otherwise be subject to income tax, your nest egg grows tax-free until withdrawal (after age 59-1/2 without penalty). Some employers will match some or all of your contributions into these plans.

It is a good idea to invest in these tax-deferred savings plans. However, consider adding other non-tax-deferred investments to your mix as there are a few downsides to tax-deferred plans:

• Withdrawals from these plans are taxed as ordinary income -- not at the lower capital gains rates of Roth IRAs or unsheltered investments.
• Withdrawals from your 401(k) increase your retirement income, which increases the amount of your Social Security check that is taxed.
• If you are currently paying a mortgage, contributing to a retirement plan reduces your income and therefore reduces the value of your mortgage-interest deduction.

As with all your investments, spread your tax-deferred money across a sensible mix of reasonably conservative investments. It's especially unwise to invest a major portion of your 401(k) in the stock of a company you work for. If the company does poorly, you could both be out of a job and suffer a hit to your retirement nest egg.

Diversify Your Investments

There are many types of investment options, ranging from bank savings accounts to stocks to real estate. How do you choose?

Learn About Each Investment Option. Learn about the ins and outs of each investment choice, while keeping these key concepts in mind:

• Money and risk always march together. The bigger the risk you're willing to take, the bigger your possible gain or loss.
• Most investments are products you purchase at a cost. Costs aren't always closely related to risk or likely investment returns. Some, like low-cost index funds, are much cheaper to own than others, such as high-fee mutual funds, variable annuities, and precious metals. Over many years, low costs often translate into better returns.

Diversify Your Investments. Usually, the best long-term plan is to divide your money among several categories of well-researched and thought-out investments (for example, stock mutual funds, bond funds, and money market funds), each of which charges comparatively low fees and over time and is likely to grow somewhat faster than the rate of inflation. Within each category, further diversify your holdings among several investments.

Stick With Your Plan. And just as important as devising a sound strategy in the first place, you need to stick with it over the long term, which means being willing to ride out any temporary downturns.

For a complete discussion of the risks and rewards of each investment choice, see Get a Life: You Don't Need a Million to Retire Well, by attorney Ralph Warner (Nolo).