Don’t make common mistakes when trying to build up that nest egg

Want a comfy, happy retirement? Then avoid these mistakes:

•Cracking your nest egg before retirement. Some 45 percent of workers cash in their 401(k) plans when they switch jobs. When you change jobs, you can transfer the money from your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred.

•Spending your retirement money too early. If you’re not saving enough now (aim for at least 10 percent of your salary), you may not be able to retire later.

•Having no clue about how much to save. Online calculators at www.choosetosave.org/calculators and www.ssa.gov/retire2 can help.

•Spending your retirement savings too fast. How much can you take out each year and be almost certain that you won’t outlive your savings? Just 4 percent a year. That’s the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods.

•Ignoring asset allocation. Unless you’re a master stock-picker, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio of stocks and bonds.

•Letting Uncle Sam eat your retirement. Make smart decisions about what you hold in your tax-advantaged accounts, such as IRAs. Remember that capital gains on stocks are taxed a maximum of 15 percent, while corporate bond interest is taxed as ordinary income (up to 35 percent).

•Paying too much for advice does a lot for your broker’s retirement, not yours. Paying just 1 percent a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. Make sure the advice you’re getting is paying for itself and more.

•Retiring permanently when you really just needed a break. If you’re in your 60s, you may have two or three decades ahead of you. Now is the time, before you retire, to explore part-time or project work that you might want to take on in retirement.

Learn more at http://money.cnn.com/retirement and www.fool.com/retirement.htm. And take advantage of a free trial of our Rule Your Retirement newsletter at www.ruleyourretirement.com.

Ask the Fool

Q: What are these “points” I read about in financial articles? — A.F., Cincinnati

A: There are several different kinds of points in the financial universe. When securing a mortgage, in order to get a lower interest rate, you usually have the option of paying some points upfront, each of which is 1 percent of the value of the loan. Indexes such as the Dow Jones industrial average are often quoted in points, not dollars, even though their components may be stock prices. Finally, a “basis point” is one one-hundredth of a percentage point. So an interest rate that rises from 6 percent to 6 1/2 percent has advanced 50 basis points. We hope we’ve made our points.

Q: I’ve been told that to determine a company’s value, I should check the relationship of current assets to current liabilities. Does that make sense? — C.J., Syracuse, N.Y.

A: When you divide a company’s current assets by its current liabilities, you’ve got its “current ratio,” which tells you if it has sufficient short-term assets (such as cash and expected payments) to cover its short-term obligations (such as payments and interest due). The “quick ratio,” which subtracts inventories from current assets before dividing by current liabilities, is a bit more meaningful.

A company’s debt situation is good to know, but it’s just a tiny piece of its profile, telling you nothing about its profitability, long-term debt, growth rate, competitive position or valuation. Ideally, you should examine a company from many different angles, crunching a lot of numbers, such as profit margins, growth rates, and more. Checking out a firm’s management is smart, too.

You can learn more about how to evaluate companies and invest at www.aaii.com/invbas and www.better-investing.org.

My Smartest Investment

The smart thing we did was to purchase 100 shares of National Penn Bank in 1984 for about $2,350. There have been lots of stock dividends paid and stock splits since then. We now own 1,970 shares, worth around $50,000. This is a well-managed bank that has received numerous distinctions. Our big mistake was not signing up to have the cash dividends reinvested in additional shares of stock. Had we done so, we would now have an additional 556 shares, worth an additional $14,500. — Robert E. Rochelle, Reading, Pa.

The Fool Responds: You were indeed smart, but you’re right — you could have been smarter. Reinvesting dividends is a great way to painlessly turbo-charge your investment. You usually won’t miss getting that cash, and each share it buys will soon be kicking out dividends of its own. Some brokerages will reinvest dividends for you — ask yours, or learn more about finding a new one at www.broker.fool.com or www.sec.gov/investor/brokers.htm.