The good news and bad news about your nest egg: You can find ways to make it last, but it's not going to be pretty.

I’m retired and have lost a third of my savings and a third of my monthly income. I don’t have earnings, so I can’t add new money to my retirement portfolio. I also don’t have enough time to wait for a  market recovery to recoup my losses. What can a retiree in my position do? - B.P. Ocala, Fla.

I’m not going to sugarcoat my answer. Fact is, you and other retirees who have seen the value of their retirement portfolios decline substantially over the past year are in a tough position.

The problem comes down to this: The double-whammy of investment losses and withdrawals from your nest egg to pay living expenses dramatically increase your chances of running through your retirement savings prematurely, which is something you obviously want to avoid.

The good news is that there are some moves you can take to reduce your odds of outliving your savings. The bad news is that those moves aren’t very appealing.

To put it bluntly, to assure that you don’t run out of money before you run out of time, you may very well have to scale back the retirement lifestyle you had envisioned, at least temporarily.

In this column, I’ll explain what retirees and people on the verge of retirement who have suffered sizable losses in their portfolios need to do to salvage their retirement. Indeed, even people who haven’t incurred big losses may also want to read on so they’ll know what to do should they find themselves in that position later on.

But before I get to what you should do, I want to point out that many people facing this problem may be focusing their attention in the wrong place. Since it was the huge drop in stock prices that decimated their portfolios and put them into this financial bind in the first place, many retirees have naturally assumed that the answer to their problems lies in changing their investing strategy.

Toward that end, many people have moved much, if not all, of their investment stash to “safe” alternatives such as stable-value funds, money-market accounts and CDs in an attempt to staunch the bleeding in their retirement portfolios.

Revisiting your investing strategy is certainly appropriate given what’s been going on in the financial markets lately ( although as I’ve noted before, plowing all or nearly all of your retirement savings into low-yielding secure options can backfire over the long run.)

But you really need to concentrate your attention on withdrawals. Specifically, you must figure out how much you can reasonably pull from your retirement accounts each year given their current value without draining them prematurely.

And as unpleasant as the prospect may be, you may very well have to withdraw less than you had planned – perhaps much less – in  order to have a realistic shot at making your savings last throughout retirement.

Here’s why.

A variety of studies have demonstrated that if you limit the amount you withdraw in the first year of retirement to 4% or so of your portfolio’s value and then increase that amount each year for inflation to maintain your purchasing power, you’ll have roughly a 90% chance of your money lasting at least 30 years.

But those odds decline dramatically if you sustain big investment losses early in retirement. For example, recent research by investment firm T. Rowe Price shows that if a retirement portfolio invested 55% in stocks and 45% in bonds looses 20% the first year of retirement, your odds of being able to pull an inflation-adjusted 4% of the portfolio’s original value each year drop from 90% to about 60%.

And if the portfolio takes a 30% hit, the odds drop to about 40%. The reason is that the combination of steep losses and withdrawals so depletes your capital that your portfolio can’t fully recover even after the market rebounds.

Which means that if you want to reduce the odds of your savings running dry too soon after a major setback, you really have little choice other than to reduce the amount you withdraw from your savings.

The question is how much should you cut back?

It’s hard to give a definitive answer because the right withdrawal amount depends on a variety of factors, including how large a loss you’ve experienced, how quickly you expect the market to recover, how many years you want your money to last and how much assurance you need that it will last that long.

But T. Rowe’s research suggests that the cutbacks may have to be substantial. Indeed, if your portfolio’s balance has dropped by 20% to 30% and you want a 90% chance that your savings will support you for at least another 30 years, you should probably scale back your withdrawals to about 4% of your portfolio’s new reduced balance – that is, it’s value after the losses.

Let’s say, for example, that going into retirement you had a portfolio worth $1 million from which you had planned to withdraw 4%, or $40,000. But if your portfolio declined in value by 20% to $800,000, instead of withdrawing $40,000, you would instead withdraw $32,000, or 4% of your portfolio’s reduced balance of $800,000. And if your portfolio dropped 30% to $700,000, you would withdraw just $28,000.

You could pull out a bit more – $35,000 and $30,000, respectively in the example above – but then you would have to forego increasing your withdrawal for inflation the first five or six years of retirement. Either way, we’re talking a big reduction from your planned $40,000 initial withdrawal.

Of course, you don’t want to be making cutbacks for your situation based on one hypothetical scenario. If you’re well into retirement, for example, you don’t need your savings to last 30 years. So you may not have to reduce your withdrawals nearly as much. The same goes if your retirement investments haven’t taken a very big hit.

So how can you tell out how much you may need to trim withdrawals given your age, the beating your portfolio has taken and the level of assurance you want that you won’t outlive your savings?

One option is to go to an online tool like T. Rowe Price’s Retirement Income Calculator. You plug in such information as the current value of your savings, how your money is invested and the amount you plan to withdraw, and you’ll get an instant evaluation of whether your savings will last as long as you’d like. You can then see how your prospects change by lowering your withdrawals.

Or you can have a financial adviser run the numbers for you. Any competent adviser should be able to do that, but you want to be careful you don’t end up with someone who sees this analysis as an opportunity to sell you high-priced investments you don’t need. (For the names of reputable advisers, you can click here and here.)

Of course, determining how much you can reasonably withdraw from your savings is one thing. Living on that amount is another. I’m sure that to do so many retirees will have to make painful adjustments to their lifestyles. And some people may simply may not be able to get by on significantly smaller withdrawals.

So I’m not suggesting this will be easy. But whether it’s cutting discretionary spending whenever possible, working part-time, downsizing or taking out a reverse mortgage or even reducing withdrawals by a smaller amount than suggested, you do what people have always done in difficult situations: you make the compromises you can.

It’s possible this retrenchment will be only temporary. Depending on the losses you sustained, how quickly the economy and the financial markets recover and how robust that recovery is, you may be able to boost withdrawals later on so that you can once again live the retirement you envisioned.

For now, though, it’s crucial that retirees and near-retirees do the sort of analysis I’ve described ASAP. Because if you simply pull money from your savings based on the income you would like to have versus the withdrawals your portfolio can actually support over the long term, you may find yourself in even bigger hole later on, recovery or no.

You can always make a case to regularly retool your account – and this year, it's especially important.

Normally I rebalance my 401(k) at the end of the year. But considering the losses I have in my account, do you think I would be better off waiting for the market to stabilize before rebalancing? - Samuel Fritts, Cary, N.C.

If you’re a movie buff, you probably remember that famous scene in “The Graduate” where Benjamin Braddock, played by Dustin Hoffman, is wandering through a crowded party celebrating his college graduation when a friend of his parents, Mr. McGuire, pulls him aside to offer some career advice.

“I just want to say one word to you. Just one word. Are you listening?” Weighty pause. “Plastics.”

Clearly, there’s no single word of advice that can address all the issues investors face in today’s perilous environment. But if I did have to limit myself to one word at this time of year, this one would certainly be a candidate: Rebalance.

Yes, I know that rebalancing has become the financial equivalent of your mom’s “eat your vegetables” dictum, a mantra repeated so often that we really don’t hear it anymore. Which is why I often think of rebalancing as the Rodney Dangerfield of investing strategies – it gets no respect.

Truth is, though, that selling assets that have outperformed and plowing the proceeds into those that have lagged (or investing new money into sagging investments) is an easy and effective way of maintaining the right balance between risk and reward in your portfolio.

Quite simply, rebalancing prevents your portfolio from getting too risky when the market is soaring (thus setting you up for a nasty shock when a setback occurs); and it stops your portfolio from becoming too conservative when stock prices fall (leaving you unprepared for a rebound).

And if that’s not benefit enough, research also shows that rebalancing can improve your portfolio’s performance over the long term by smoothing out its ups and downs.

But as solid as the case is for rebalancing on a regular basis, I think it’s especially important to do it this year.

Why? Well, given the beating the stock market has taken this year, the balances of the stock funds in your 401(k) and other retirement accounts have probably declined significantly. Which means that when you rebalance, you will have to shift some of your 401(k) money into those beaten-down stock funds.

I can already imagine you saying, “What? Move money into stocks now? Are you bonkers? That’s the last thing I want to do.”

That reaction is understandable. The stock market has been hammered mercilessly, and no one is sure when the devastation will end. So the natural impulse today – even for someone like you who actually knows he should rebalance – is to stay away from stocks until there’s some assurance that they won’t fall even further. Hence your desire to hold off rebalancing until the market “stabilizes.”

The problem with acting on that impulse to postpone rebalancing until you feel better about doing it is that you’re eliminating one of the main reasons to rebalance: it forces you to buy assets when they’re unpopular.

If you were to always delay rebalancing until a sinking investment recovers – whether it’s stock funds or any other part of your portfolio – you would essentially be buying in mostly when that asset’s price is rising. Do that, and your long-term returns will suffer because you won’t scoop up shares at depressed prices, which is precisely when they’re more likely to deliver superior long-term gains.

In other words, by second-guessing your normal rebalancing routine, you’re undermining the very purpose of the exercise in the first place, which is to take the guesswork and emotion out of managing your portfolio.

That said, it’s also important to remember that rebalancing is a tactical move that makes sense only if you’re doing it as part of an overall plan. Rebalancing is meaningless if you haven’t set an appropriate asset-allocation strategy for your retirement accounts.

After all, if you don’t maintain a mix of stocks and bonds that’s suitable given your age and risk tolerance for your portfolio, then you have nothing to rebalance back to. And if you’ve set an asset allocation that’s inappropriate, then rebalancing back to it wouldn’t do much good either.

Unfortunately, whether it’s because they had no plan to begin with or were unrealistic in setting their stocks-bonds mix, many investors went into this downturn more heavily invested in stocks than they should have been.

The Employee Benefit Research Institute estimates that at the beginning of 2007 nearly 40% of 401(k) participants 56 to 65 years old had 80% or more of their accounts invested in stocks. That’s a pretty high-octane mix for people nearing retirement.

So before you do any rebalancing, you’ll first want to re-assess your investing strategy to assure that you have a mix of stocks, bonds and cash in your 401(k) that’s appropriate for you. (For help creating a suitable blend or evaluating the one you have, you can check out our Ultimate Guide to Retirement.

Once you’ve done that, though, you’ll want to go ahead and rebalance as planned, even if it’s emotionally difficult to do so. Otherwise, you’ll be abandoning your regimen just when it’s likely to do you the most good.

by JEANNE FLEMING, PH.D. and LEONARD SCHWARZ

Question: My seven-year-old son and our neighbors’ son were roughhousing at our neighbors’ home when my son accidentally broke their new high-def TV. I replaced the set. Shouldn’t our neighbors have offered to pay for half, since they ought to have been keeping a closer eye on the kids?

Answer: You’re right that you are on the hook for the loss. Parents are responsible for the damage that their children do, and the fact that your neighbors could have monitored the boys more closely doesn’t outweigh that responsibility. At age seven, your son should have learned – from you – not to engage in horseplay in the vicinity of expensive, breakable items and to be especially careful in someone else’s home.

That said, assuming your homeowners insurance didn’t cover the cost of a new TV, your neighbors should have offered to split the bill. It takes two to roughhouse, and it was just bad luck that your child was the one who actually broke the set.

Getting these folks to refund part of the tab is another matter. Our guess is that they’re not likely to look kindly on being presented with an after-the-fact bill. But it can’t hurt to point out to them that your son had a partner in crime. After all, be it in the family room or the courtroom, accomplices bear some responsibility when damage has been done. Good luck with your neighbors – and good luck civilizing the offspring as well.

Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.

by JEANNE FLEMING, PH.D. and LEONARD SCHWARZ

Question: I’m a salesman with a small company whose CEO is on the board of the local United Way. Everyone here is expected to participate in the firm's annual fundraising drive for the agency. I disapprove of some things about the United Way and don't want to contribute. But my co-workers all say I'll be hurting my career if I don't. What should I do?

Answer: Listen to your co-workers. Of course you should also pay heed to your conscience. But if your conscience prohibits you from making a contribution, you need to look for a new job, not commit professional hari-kari at this one.

Not that we endorse the strong-arming you're getting – far from it. While it’s one thing to require employees to be team players, it’s quite another to punish one who fails to contribute to the boss’s favorite charity. That’s wrong no matter how worthy the organization you’re forced to support.

As unethically as your CEO is behaving, though, the abuse of power for the benefit of a charity you dislike is not the sort of conduct you have a moral obligation to challenge. Moreover, there’s no virtue in getting yourself labeled a troublemaker. Indeed, you owe it to yourself and your family to see that you don’t.

There are plenty of firms where charitable donations aren’t mandatory. If you don’t want to contribute to the United Way, try to find a job at one. But in the meantime, toss in twenty bucks and consider it an investment in your future.

Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.

by JEANNE FLEMING, PH.D. and LEONARD SCHWARZ

Question: A few years ago I gave my sister my old car. Now Emma’s bought a new one and sold mine to our 18-year-old brother. I’m furious she didn’t just give the car to Colin, as I gave it to her. Mom says that I should mind my own business, that Emma isn’t as well off as I am. Who’s right?

Answer: Sorry, but unless you told Emma that there was a string attached to your gift – that when she disposed of the car, she had to give, not sell, it to a family member – your sister was free to take Colin’s money. Her financial situation doesn’t matter.

We understand why you may have believed your sister would follow your generous example. But that’s taking too much for granted. It was reasonable for you to assume that Emma would, say, buy insurance and otherwise transfer the liability associated with the car from you to her. But people quite honorably sell things to their relatives all the time, and there’s no “once a gift, always a gift” rule. If you felt the car belonged to your family, you needed to tell your sister that at the time you gave it to her.

This doesn’t mean, though, that you shouldn’t tell Emma you disapprove of her making a buck off your baby brother. While you have no right to expect her to adhere to your unspoken wishes, you do, as her benefactor, have every right to let her know what you think of what she did with your gift.

Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.

Question: My 20-year-old son applied for a Macy's charge card but was rejected. When he ordered his credit report, we discovered that my ex-husband, who has the same name as my son, opened a Comcast cable account using our son's Social Security number, then neglected to pay $453 in charges. How can we fix this?  – Name Withheld, Fla.

Answer: Identity theft is frustrating enough to deal with, but even worse when a family member or friend turns out to be the culprit. Sadly, it's not uncommon. Of ID theft victims who know how their personal information was taken (and fully half do), the most common factor cited is that someone they know – a relative, friend or co-worker – stole it, the Federal Trade Commission says.

In any ID theft case, as soon as you spot something amiss, go directly to the source – in this case Comcast. Alert the credit bureaus too, but always fix the problem with the source to keep it from cropping up again. Though most bureaus allow you to file disputes online or over the phone, when a situation is as complex as your son's, it's best to send a letter and documented proof of the mistake via certified mail. You should also file a police report, which many creditors require, and include that with your dispute letter. Then, if it happens again, it'll be easier to clear up.

When I contacted Comcast, spokeswoman Jenni Moyer apologized that you weren't able to get the situation resolved at your local Comcast office (she suggested contacting the corporate customer care hotline in the future). Comcast asked the collection agency that reported your son to the credit bureaus to remove the $453 charge and send a letter to the credit bureaus, clearing your son's record.

Since then, I'm happy to hear that your son not only was able to obtain a credit card but has a solid 700-plus credit score. Repairing damage to a credit score is tricky but doable. Rebuilding the trust between your son and his father may be tougher.

Tip: Spot identity theft early by monitoring your credit report for unauthorized activity. Go to annualcreditreport.com to request your credit report free once every 12 months from each of the three major credit bureaus.

So far Money Helps has saved readers $194,442.03.

Having a financial nightmare? E-mail Donna Rosato at money_helps@moneymail.com.

by JEANNE FLEMING, PH.D. and LEONARD SCHWARZ

Question: Years ago, my mother-in-law gave my husband and me a pair of paintings of Tim’s great-grandparents. They hang in our home, and we love them. But now Grace wants the paintings back so she can give them to the local historical society, which is celebrating its centennial. What should we do?

Answer: Take a few deep breaths and tell her no. Just because something is a family heirloom doesn’t mean the person who once owned it continues to have a claim on it after it’s been handed down a generation. Rather, it’s the property of the new owner, whose only obligation is to respect its heritage. So unless Grace told you when she dropped off the paintings that she was lending and not giving them to you, they’re yours to enjoy, not hers to enjoy giving away a second time.

We know: It’s your mother-in-law, and saying no isn’t easy. So here’s an approach to consider. Have Tim tell his mother that you treasure the family portraits too much to let them go, but that you’d love to lend them to the historical society for its centennial. In dealing with the organization, though, be certain to make all the arrangements yourself. Given your mother-in-law’s weak grasp of the concept of ownership, the last thing you want is for her name to be on the paperwork at the historical society or for anyone there to assume the portraits are to be returned to her.

Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.

by JEANNE FLEMING, PH.D. and LEONARD SCHWARZ

Question: We own a vacation condo we’ve always been happy to lend to friends. Lately, though, we’re constantly being asked for it, which has begun to interfere with our own plans. Plus, the wear and tear from these visits is taking its toll. Would we be wrong to charge rent in order to discourage friends from abusing our hospitality?

Answer: Not at all. Look, there’s a name for friends who systematically help themselves to what others have paid for, and it’s freeloaders. Whatever these folks who are imposing on you may imagine, you’re not obligated to provide them with a vacation getaway.  On the contrary, asking them for some rent is ethical, fair and honorable – unless, of course, you’ve invited them there as your guests.

Presumably, of course, you neither want to overcharge your friends nor offer a bargain that’s irresistible. So talk to a realtor about what condos like yours rent for and what the typical “family and friends” rate is. Then think about whether you want to charge different people different rates based, perhaps, on how close you are to them or how much they can afford. Be forewarned, though, that while there’s nothing unethical about a sliding scale, it could lead to friction.

And brace yourself for another source of friction as well: Nobody likes a take-back. Instead of being as appreciative as they should be of your generosity, some of your pals – the true freeloaders – may get angry when you ask them to contribute. Of course they have nothing to complain about – but when did that ever stop anybody?

Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.

Question: I invested $1,000 with a company called MTE in 2006. At a church meeting, MTE claimed to invest in securities and promised a monthly return of 25%. Before I got any payment, the state froze MTE’s funds, saying it was a fraud. Will I get my money back?  – Steven Collins, South Holland, Ill.

Answer: Oh, dear! You let yourself get snared in a classic pyramid scheme, where scam artists recruit investors with promises of humongous returns, pay the early investors using money from the later ones – and spend the rest on themselves. Usually, by the time you realize you’re involved with no-goodniks, they’ve skipped town.

But thanks to the Illinois attorney general, you may get something back. According to prosecutors, Roy Fluker Jr., the founder of MTE (short for More Than Enough Wealth Creation Institute), and his cohorts hosted recruitment meetings at African-American churches on the South Side of Chicago eight to 10 times a month. They offered attendees “opportunities” to invest up to $20,000 a year for an ultrahigh return – 25% a month for 12 consecutive months – and said the money was going into stocks, real estate and foreign currencies.

But prosecutors say MTE invested in nothing. Most of the money went to repay early investors and to reward MTE’s principals with cruises and other trips. Illinois froze MTE’s accounts, valued at more than $3.1 million, shortly after you invested. “They were offering returns that you know can’t be real,” says Tom James, the lead prosecutor. Fluker and friends have pleaded not guilty and are awaiting trial.

While Illinois has dissolved MTE and banned Fluker and co-defendants from selling securities, no money has been returned to investors. The AG’s office is sending claim letters to the 3,000-plus victims and has posted claim forms on its Web site at illinoisattorneygeneral.gov. With limited funds remaining, you’ll probably get only a portion of what you invested. Still, you’d be lucky to get anything back in a deal like this one.

Tip: The stock market’s long-term return is about 10% a year. Any deal that “guarantees” lots more is suspicious. A promise of an outsize return on an investment should set off an alarm in your head.

So far Money Helps has saved readers $193,989.03

Having a financial nightmare? E-mail Donna Rosato at money_helps@moneymail.com.

- Reporting by O.C. Ugwu

Question: My company's 401(k) vesting period is longer than I plan to stay at my job. Should I still invest in my 401(k) knowing that I will not receive any employer matching?
- Andrew, West Palm Beach, Florida

Answer: The short one is, Yes, you should still contribute to your 401(k) account even if there’s the chance that you may not get your employer’s matching funds.

But before I get into the reasons why, I want to make sure you and other people in your situation understand a bit about the ins and outs of vesting, which refers to the portion of your 401(k) that you actually own at any given time and that you get to take with you if you leave the company.

To begin with, I want to be perfectly clear that you are always 100% vested in all of the contributions you make to your 401(k), as well as all the investment earnings your contributions generate. That money is yours no matter what. Vesting requirements affect only the money your employer kicks in, as well as the investment earnings stemming from employer contributions.

You should also know that employers have some latitude in how quickly you vest. According to a 2007 survey by Hewitt Associates, about 44% of companies use immediate vesting. In other words, you’re always the owner of your entire account balance – your contributions, the employer’s and all earnings.

On a cliff or on a grade

Other companies employ either “cliff” or “graded” vesting. With cliff vesting you become the owner of all the employer’s contributions and any investment earnings of those contributions only after you’ve been at the company a certain number of years. Leave before that period and you get none of the employer’s matching funds.

Companies using cliff vesting used to be able to require that you stay as long as five years to be entitled to their contributions, but the Pension Protection Act (PPA) of 2006 lowered the maximum to three years.

Other firms employ “graded” vesting, which gradually gives you ownership of the company’s contributions and the earnings attributed to those contributions over a period of up to six years. (Prior to the PPA, the max was seven.)

That means if your 401(k) has five-year graded vesting (which is most common among plans with graded vesting) and you leave after three years, you would be entitled to three-fifths, or 60%, of your employer’s contributions and any earnings from them.

So before you make any assumptions about how much of your account balance is yours if you leave, I suggest you first check with your HR department to be sure you understand exactly how your plan’s vesting schedule works. You may find that you don’t have to stick around as long as you think to get most, if not all, of the portion of your balance resulting from your employer’s contributions.

You may also want to factor the vesting schedule into any plans you have to leave your job. After all, if your company has three-year cliff vesting and you’re within shouting distance of three years on the job, it may make sense to time your decision to leave so you can pick up those three years’ worth of employer contributions and their investment gains, if any.

The bottom line

Even if you think it’s unlikely you’ll end up with a single cent of what your employer chips in, however, I still think you’re better off participating in your company’s 401(k) than not.

Why? Well, your 401(k) is still a pretty sweet deal even if it has absolutely no provision for a company match. For starters, there’s the convenience of having your contributions automatically go from your paycheck into your 401(k) account. Given how much easier it is to spend than save, I don’t think you can overstate the value of putting your savings plan on autopilot.

And then there are the tax advantages. You get to invest pre-tax dollars, which lowers your current tax bill. And your contributions rack up returns without the drag of taxes. Yes, you’ll pay tax on your 401(k) kitty when you begin withdrawing the money at retirement. But by not having to pay taxes on gains during your career, you effectively earn a higher after-tax rate of return than you would in a taxable account, which means a larger after-tax value for your nest egg in retirement. (For an example, click here).

Granted, you could forego your 401(k) and get comparable tax benefits in a deductible IRA or a Roth IRA, assuming you qualify for them. But the maximum contribution amounts are much lower for IRAs: $5,000 this year, plus $1,000 if you’re 50 or older versus $15,500 plus $5,000 for 401(k)s (although some plans allow you to put away less).

Combine a 401(k)’s higher contribution limits with the ease of payroll deductions and the fact that there’s absolutely no chance of getting an employer match in an IRA, and you have a much better shot at building a large nest egg with a 401(k) than an IRA.

So as long as you’re still at this company, I suggest you participate in your plan. No matter when you leave, at the very least you’ll be assured of having the money you contributed, plus whatever it earns.

And if it turns out that you end up hanging around long enough to collect all or some of your employer’s match and investment gains from those funds, well, you can just think it as a little parting bonus from your old firm.

How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith – the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com.

Question: I’m 20 years old and have just started a new job. For the first time I now have the opportunity to participate in a 401(k). But with all that’s been going on lately, I wonder whether I should hold off signing up until things get better. What do you think? – Sarah, Las Vegas, Nevada

Answer: I don’t blame you for feeling apprehensive – or flat out scared, for that matter – about investing in the financial markets these days. To call the last few months, and last week in particular, nerve-wracking would be like saying root canal without anesthesia is a little uncomfortable.

But despite all the upheaval and the uncertainty that still prevails, I think it would be a mistake for someone your age to postpone contributing to her 401(k).

In fact, I think it would be a mistake for virtually anyone, regardless of age, to forego saving for retirement in a 401(k) or similar account in reaction to the recent failures, takeovers, freefalls in stock prices, etc.

That’s not because I think the bailout plan that the administration and Congress are working on – which goes by the acronym TARP, for Troubled Asset Relief Program – will make all the problems in the economy and the credit markets disappear and quickly send the stock market to new highs.

Far from it. While the three-page bailout proposal the White House sent to legislators does contain some specifics – like asking for authority to spend up to $700 billion to buy shaky mortgage-related assets from financial institutions – there are still lots of details to work out. And the plan has to be OK’d by Congress, which means its final shape is even more of a question mark.

Even if lawmakers respond with uncharacteristic speed, it’s still unclear how well the plan, whatever it turns out to be, will work. The market’s big rebound at the end of last week was encouraging, but I think that was essentially a huge sigh of relief that we’d pulled back from the abyss.

What with job losses, no turnaround in sight for house prices and battered financial institutions hardly in a position to shovel out credit as they did in the recent past, it’s not as if our economy is positioned for cruising speed.

So I wouldn’t be surprised after the “whew” effect has set in if the stock market retreated again or began bouncing around without much forward progress. For all I know we could even see more episodes of panic if more bad news pops up. (Which is all the more reason for you to get a better understanding of the safety net underlying your various types of accounts, if you haven’t already done so.)

Taking the long view

That said, I believe it would be foolish in the extreme to write off the long-term prospects for stocks. Ultimately, stock values hinge on the productivity of U.S. workers and the earnings power of American companies. And it’s not as if those engines of long-term growth are about to disappear.

Granted, we may need some time to work through the detritus of the housing bubble and lending excesses. And stock returns could very well be anemic as that happens. But history shows that some of the best long-term gains go to investors willing to buy stocks when they’re reviled, as in the years following major setbacks like the 1929 crash and the 1973-1974 bear market.

Of course, the long view may not seem particularly relevant to you at the moment. But remember: the money that you contribute to a 401(k) is going to be invested for many years. That’s obvious in the case of someone in her 20s, who has a good 40 or more years until retirement.

But it’s also true for someone even in the late stages of his or her career. After all, if you’re 60 or 65, you’ll likely still be drawing on your retirement savings well into your ‘80s or ’90s. In effect, that means you’ve got an investing time horizon of 25 to 30 years for the dollars you contribute today.

Not whether or not, but how

So as I see it, the real question isn’t whether you should be contributing to a 401(k). It’s how you should be investing the money you contribute, as well as the money that’s already there.

If you’re in your 20’s or 30s, you still want most of your 401(k) money in stocks, say between 80% and 90%. I know that may be a tough sell emotionally in these uncertain times. The last thing you’re probably looking forward to is watching your 401(k) balance take more hits n the near future, which I think you should expect when you commit that much to stocks. But the important thing isn’t what your 401(k) is worth over the next few years; it’s what its value will be in 2040 and beyond.

Even if you’re older, you should still think of the money you’re contributing now as a long-term investment. But you also need to give some consideration to preserving the assets you’ve already accumulated.

That means dialing back your stock exposure somewhat, although you don’t want to hunker down completely in bonds and cash. Lightening up on stocks will give you more short-term stability. But if you get too conservative, you run the risk of stunting the eventual size of your nest egg – and your lifestyle in retirement.

There’s no stocks-bonds mix that’s appropriate for everyone at any given age. It depends on how much risk you’re comfortable with and what other resources you can draw on. But generally if you’re in your 40s, you might still have upwards of 80% or so in stocks, although that percentage might drop to 70% or so in your 50’s and to 55% to 60% in your 60s.

Don't time the markets

One final thing: As regular readers of this column know, I’m not an advocate of trying to outguess the markets and moving in and out of stocks or other sectors based on your opinion (or feeling, guess, trenchant insight, whatever) of where the market may go.

I believe that the best way to deal with the inherent uncertainty of investment markets is to settle on an asset allocation that makes sense for you and, aside from rebalancing back to it once a year, pretty much leave it alone (or at least refrain from making big changes).

But even if you disagree with me on this, it would still be a mistake to forego contributing to your 401(k for the simple reason that you would be giving up the chance to put away money for retirement and missing some nice tax benefits in the bargain.

So even if you can’t reconcile yourself to investing along the lines I’ve suggested. Indeed, even if you can’t bring yourself to invest in stocks or bonds at all. Then contribute to your 401(k) and put your money in a stable value fund or a capital preservation fund.

I still think you would be making a terrible investing mistake to limit yourself to such accounts. But at least you’ll be putting away money for retirement. And if you do decide to reform your investing strategy later on, you won’t be starting from scratch.

This is the second part of a two-part story on safeguarding your investments in a market crisis. Read Part 1: Banks and Insurance.

MUTUAL FUNDS: (including money-market funds): No fund company has joined the growing list of financial institutions reeling from losses or requiring a bailout (at least not yet). But based on emails I’ve gotten recently, some individual investors still wonder whether they could lose any of the money they have invested in a mutual fund if the fund company were to fail.

The short answer is no. The security of the assets you have in a mutual fund has nothing to do with the financial health of the fund company itself.

The reason is that the money you have in a stock, bond or money-market mutual fund is not a part of the fund company’s assets. So it wouldn’t be up for grabs to pay obligations of the fund company.

In fact, the fund company – Fidelity, T. Rowe Price, etc. – owns neither the mutual fund itself, nor the assets in the fund. The fund is a separate legal entity that is owned by the fund shareholders – which would include you, if you’re invested in the fund. The fund company merely has an agreement with the fund to manage its assets and sell the fund’s shares.

What’s more, the fund assets aren’t even held by the fund company. Those assets are held in a custodial account, usually at a bank or trust company. And that bank or trust company doesn’t own the assets either or, for that matter, have access to them other than for what’s necessary for the fund to operate.

And to protect shareholders from the extremely unlikely chance that some rogue fund employee or other person would somehow manage to get at a fund’s assets, federal law requires funds have fidelity bond insurance that covers instances of fraud, embezzlement and the like.

So in the event a mutual fund company failed, the assets of the fund itself – the assets owned by the funds shareholders – would be unaffected by the failure. Either the failing fund firm would transfer the assets to another fund company or the fund’s board of directors would arrange for the transfer. Either way, fund shareholders would have to okay the new arrangement.

Of course, the market value of your mutual funds is a different story. Regardless of the health of the fund company, the value of a fund’s assets is tied to the value of the securities it owns. So if you own, say, 1,000 shares in a Standard & Poor’s 500 index fund that are valued at $10 a share and your fund company were later to go belly up, your 1,000 shares would be secure.

If, in the meantime the S&P 500 index were to drop 25% – which is roughly the loss the S&P 500 has suffered since its peak last October – those shares would be worth $7,500, not the $10,000 you originally paid. But the market’s decline caused that $2,500 loss, not the fund company’s failure.

There’s one area in mutual funds, however, where people have also come to expect protection from market risk. Here, I’m talking about money-market funds.

Although the value of money-market fund shares are not now nor have they ever been guaranteed, fund companies have long attempted to assure that money-market funds maintain a value of $1 per share.

There have been many times, notably over the last year or so, when fund sponsors have stepped in to shore up the value of their money-market funds. But except for one instance in 1994 when a small money-market fund that catered to institutional investors faltered, no money-market fund had “broken the buck.”

Until now. On Tuesday, the net asset value of the $64.8 billion Reserve Primary money-market fund slipped to 97 cents a share. Then, on Thursday Putnam said it was liquidating an institutional money-market fund, as large redemptions raised the possibility that its net asset value could drop below $1.

In the wake of these developments, the Treasury department announced plans to guarantee up to $50 billion for the next year for both institutional and retail money fund investors.

Is it possible we could still see more money funds break the buck? In this market, I suppose almost anything is possible. But I expect this federal backstop will boost investors’ confidence and make it a lot less likely.

Still, I think you should be conservative when choosing a money fund, avoiding those with suspiciously high yields and sticking to funds of large well-known companies that have deep pockets and reputations to protect. You can reduce risk even further by limiting yourself to funds that invest in Treasury securities only.

But if even the small chance of a small loss is too much for you, you can always move your cash to a bank money-market account, in which case you’ll be eligible for the FDIC insurance I described above.

BROKERAGE FIRMS: Given the troubles at Lehman, the sale of Merrill Lynch and rumblings of problems at other investment firms, investors understandably want to know how the assets they hold in brokerage accounts would fare if a broker shuts its doors.

As with a mutual fund firm, the assets you own in a brokerage account – such as stocks, bonds, money-market funds and mutual funds – are segregated from the brokerage firm’s own assets.

So in the event a brokerage firm fails or shuts down its business for other reasons, it’s the firm’s own assets that are responsible for paying the firm’s obligations, not the customer’s assets. Typically, you or the troubled brokerage firm would just transfer your holdings to another brokerage firm where would have access to them.

Sometimes, though, things don’t go smoothly. That’s where SIPC (Securities Investor Protection Corp.) would step in. Created by the Securities Investor Protection Act of 1970, SIPC is not a government agency like the FDIC. Rather, it’s a nonprofit funded by member brokerage firms that operates a fund that as of the end of last year had $1.5 billion in assets.

If a brokerage firm fails or closes for other reasons and customer assets are missing because of fraud or poor recordkeeping, SIPC will cover each customer for up $500,000, which includes up to $100,000 in cash held with the firm.

There are exceptions: SIPC doesn’t cover alternative investments such as commodity futures contracts, foreign currencies, limited partnerships and precious metals.

Remember, though, SIPC isn’t providing protection against market losses or bad investments. Rather, its aim is to replace securities that are missing from customer accounts, up to the limits of its coverage. For more on how SIPC works, you can check out this story by my Money Magazine colleague Joe Light, and you can visit the SIPC Web site.

So if you haven’t done so already, I suggest you go through your various holdings and assess your vulnerability. You may find that your worries are groundless, or at least not as bad as they seem. And if not, well, at least you’ll be able to chart a course on the basis of facts rather than just fear.

by JEANNE FLEMING, PH.D. and LEONARD SCHWARZ

Question: When the old fence between our property and our neighbors’ collapsed, we agreed to split the cost of a new one. No matter what kind of fence we propose, though, they object. At this point, can we just put up a fence we like and pay for it ourselves? Or can we bill them for half?

Answer: Your property, your call. Feel free to build any fence you choose, as long as it conforms to municipal ordinances and is on your side of the property line. But forget about sending that bill. You can’t expect your neighbors to pay for a fence they didn’t agree to. And while it’s true that they may benefit from it, that’s beside the point. Were they to re-landscape their front yard or repaint their house, you’d hardly expect to pay a portion of the cost, even if these improvements dramatically increase the curb appeal – and the value – of your home.

Before you install the fence, though, tell your neighbors about your plans. Since you’ve already agreed to share the cost and selection of the fence with them, you need to tell them that rather than wait any longer, you’ve decided to move ahead on your own.

Finally, while you’re under no ethical obligation to cater to their tastes, you do want to have a good relationship with your next-door neighbors, right? So put up a fence they might not love but that you’re fairly confident they’re unlikely to hate. After all, you don’t want to give them good reason to ignore your preferences when they work on their property.

Questions? Email Money Magazine’s ethicists – authors of “Isn’t It Their Turn to Pick Up the Check?” (Free Press) – at FlemingandSchwarz@right-thing.net.

Given all that’s been going on in the financial markets lately, it’s no surprise that I’ve gotten lots of queries from people who are worried about what might happen to their investments and retirement savings should a financial firm they do business with go belly up.

Which is totally understandable. These are scary times, what with the collapse of Bear Stearns and Lehman, the sale of Merrill Lynch, Treasury’s takeover of Fannie and Freddie, the Fed’s bailout of giant insurer AIG, reports that Seattle thrift WaMu is up for sale and concerns whether even icons like Morgan Stanley and Goldman Sachs can weather the storm as independents (and this rundown doesn’t include what may have happened in the last five minutes).

But hard as it may be, it’s important to keep things in perspective in times of crisis. Although we’re definitely going through some crazy and frightening stuff here, you want to make decisions on the basis of facts and reason, not emotion and fear.

Indeed, if you simply start selling assets and pulling money out of accounts in a panic, you may very well end up in a worse position than you were in before.

So to help you get a better sense of how secure your assets are in different investments and types of accounts, here’s a rundown of the safety net that’s in place for the four types of firms you’re most likely to have financial relationships with: banks, insurance companies, mutual fund companies and brokerage firms.

BANKS: The security of bank deposits became a hot issue back in July after IndyMac bank failed, but recent questions about the health of Washington Mutual and the banking sector in general have re-ignited concerns. Just in case you’re not up to speed on what’s covered and what’s not by FDIC deposit insurance, here’s a quick recap.

Essentially, the FDIC insures deposits in several “ownership categories,” which means you may actually be insured beyond the $100,000 limit you most often hear about. For example, single accounts in your name are covered up to $100,000 per bank. Joint accounts are a separate category and also get their own $100,000 of coverage per person per bank.

So if you and your wife have a joint savings account with $300,000 in it, $200,000 of that account is insured. Retirement accounts – which must be an actual retirement account, such as a IRA, SEP, etc., not just an account you consider part of your retirement savings – are covered for up to $250,000.

These limits apply only to bank deposits, however, which include checking, savings, money-market accounts, CDs and certain trust deposit accounts. It does not apply to other investments you may buy at the bank, such as mutual funds or annuities (which are covered in the Insurance section below).

But just because mutual funds aren’t covered by FDIC insurance does not mean you would lose the money you have in mutual fund that you bought through the bank if that bank failed. Mutual fund assets are not part of the bank’s assets – they’re held in separate accounts – so they don’t even come into play when toting up the bank’s assets and liabilities.

As for the value of any mutual funds you acquired through a bank, that would be determined by the market value of their underlying securities, the same as any other mutual funds.

One caveat: if you invest in a bank money-market account, that money is covered by FDIC insurance, since that account is a bank deposit. If, on the other hand, you buy a money-market fund at the bank, that’s not covered by FDIC insurance since a money-market fund is a type of mutual fund.

For more details on bank deposit insurance, you can check out an earlier column I wrote, or you can visit the Deposit Insurance section of the FDIC’s web site.

INSURANCE COMPANIES: The fact that the federal government had to bail out AIG, the world’s largest insurer, with an $85 billion loan naturally has people wondering what will happen to their insurance policies and the money they had invested in annuities if their insurance company goes belly up.

Because insurance is regulated on the state rather than federal level, there’s no exact equivalent of FDIC insurance. But a different sort of safety net – state guaranty associations – can eventually kick in and provide some protection.

Here’s how that backstop works:

When an insurance company can’t meet its obligations, the insurance commissioner of the state where the company is domiciled (or has its legal residence, so to speak) steps in to assume control or appoints a surrogate to do so.

After reviewing the company’s finances, the commissioner then decides what steps must be taken to meet its obligations to policyholders, annuity holders and others. Those steps could include anything from selling assets, getting other insurers to assume liabilities for policies and annuities or even arranging for another insurer to take over the company.

During this time, the insurance company continues to operate. Policy holders would continue to pay premiums and would still have access to cash values in their policies and annuities (although it’s possible the commissioner could institute restrictions).

If the commissioner determines things are too far gone for the company to be rehabilitated, the company would go into liquidation.

At that point, if the value of the failed insurer’s assets weren’t enough to cover its obligations to policy holders and annuity owners, state guaranty associations would step in and try to keep them whole by transferring their policies to healthy insurers.

If that’s not possible, the guaranty associations would cover the shortfall between the insurer’s assets and obligations to policy holders up to certain limits. Most states set basic limits of $300,000 for life insurance death benefits (California has a $250,000 limit), $100,000 in cash surrender values for life insurance and $100,000 in withdrawal and cash value for annuities, although some states offer higher levels of protection.

Regardless of where the insurance company is domiciled, you would be covered by the guaranty association in your state. Learn more here about what state guaranty associations cover as well as links to the guaranty association in your state.

As with a bank failure, it’s possible you could recover more money later on if the failed institution’s assets bring in more cash than expected. But that could take many, many years.

One note on variable annuities: Most money in variable annuities is invested in mutual fund-like stock or bond “subaccounts” that are not part of the insurer’s assets. So to the extent your variable annuity investments are held in such subaccounts – as opposed to the “fixed account” investment option which typically would be part of the insurer’s assets – your variable annuity should remain insulated from the insurer’s problems.

Many variable annuities these days come with a variety of “guarantees,” ranging from death benefits to guaranteed minimum payouts. Those would be subject to the insurer’s ability to pay, although they also would fall under the umbrella of the state guaranty associations.

By the way, just because of all the attention AIG is getting, don’t assume your insurer’s health is in jeopardy. (It was AIG, the holding company, that required the bailout. AIG’s insurance companies, according to the National Association of Insurance Commissioners remain solvent and able to pay their obligations. In any case, you can get a sense of the financial health of your insurer by checking out the insurer ratings at Standard & Poor’s.

And before you make any move, such as pulling money from an annuity, you’ll first want to consider whether it may trigger a penalty. Most annuities, for example, have early surrender charges that can go as high as 20% in some cases.View this Post

Part Two: Mutual funds and brokerages

Question: I’m a 50-year-old woman who has yet to set up any retirement fund. I have $5,000 that I can invest now to get started, and I may be able to invest another $1,000 to $2,000 every quarter. But I wonder whether this is just a high-risk gamble considering that I have such a short time until retirement. Besides, I’m not even sure where to put the money if I do start saving – in a 401(k), a Roth IRA, a CD or some other option? - A. Gonzalez

Answer: Saving for retirement a high-risk gamble? Hardly. The real risky bet for you would be to continue putting off saving for retirement until a even later date or, worse yet, forgo saving entirely. In fact, that wouldn’t be much of a gamble. Barring a huge inheritance or hitting the lottery, you would be virtually guaranteeing yourself a meager retirement at best.

But if you start saving now – and keep it up over the next 15 years or so – you still have a shot at accumulating a decent nest egg. I’m not saying you’ll be as well off as you would had you started saving 20 years ago. It’s not likely you’ll be able to squeeze a career’s worth of saving into 15 years. But if you really bear down in this home stretch to retirement, you still have a good shot at dramatically improving your retirement prospects. And you will definitely be better off than if you procrastinate further or save nothing at all.

So let’s outline exactly what you must do. Basically, you’ve got to deal with three questions: how to save, where to save and how to invest your savings? Let’s take them one by one.

How to save

It’s relatively simple to get a ballpark estimate of how much you must put away each year to have a shot at a comfortable retirement. Just go to our What You Need to Save calculator, plug in your age, income and the amount you’ve saved to date (which I gather for you is zilch), and you’ll get an immediate estimate of the dollar amount and percentage of salary you should save each year between now and age 65 to achieve a decent retirement.

Don’t be surprised if the savings target you get is daunting. That’s what happens when you put off saving until the end of your career. You’ve got to really sock it away to make up for all the years of saving and compounded returns you missed out on.

But at this point, the important thing isn’t to focus on what you didn’t do, but what you must do. So just try to get as close to the recommended savings level as you can so you can at least start making some progress. And, in fact, if you follow through with your plan and put away the $5,000 you mentioned and then another $2,000 a quarter as you say you may be able to do, by age 65, you would have roughly $340,000, assuming an 8% return. That’s a pretty good-sized nest egg starting from scratch at age 50.

Where to save

Let’s start with that $5,000 you mentioned. To get the biggest savings bang for those bucks, you want to put it into a vehicle that has some tax advantages. Basically, you have two choices: a traditional deductible IRA or a Roth IRA. With a deductible IRA, you get a tax deduction for your contribution and the investment gains on that contribution grow free of taxes, although you are eventually taxed when you withdraw the money. With a Roth IRA, you get not upfront tax break, but you can eventually withdraw your contributions and earnings free of taxes in retirement.

As I explained in a feature I wrote on Roth accounts in Money Magazine’s October issue, you’re generally better off in a deductible IRA if you think you’ll be in a lower tax bracket after you retire, while a Roth is the better deal if you think you’ll face the same or higher tax rate. People who are diligent savers and build up sizable balances in retirement accounts tend to be better candidates for a Roth IRA. Given your lack of savings to date, I expect you’re more likely to move into a lower tax bracket in retirement, which would make the deductible IRA a better choice. But you can check out this calculator to compare the two.

This assumes that you qualify for either or both types of IRAs, which I expect will be the case, although you can find out here. If you don’t qualify for either, you can put this five grand into a nondeductible IRA – which anyone under age 70 1/2 with earned income can open – and then later convert it to a Roth IRA.

As for the $1,000 to $2,000 you think you can save on an ongoing basis, your best bet for that money is to get it into a 401(k), which I assume is a possibility for you since you specifically referred to a 401(k) as an option in your question. There are lots of advantages to 401(k)s. But for someone like you who obviously has some trouble saving, the main selling point is convenience. Your savings go directly from your paycheck into your 401(k) account before you have a chance to get your hands on the money and spend it. That’s a huge, huge plus when you’re trying to build a nest egg in a hurry.

The other possible advantage is an employer match. If your employer offers one – and most do, typically 50 cents on the dollar up to the first 6% of salary you contribute – contributing to the 401(k) leverages your savings effort and makes it more likely you’ll be able to meet your annual savings target, or at least get closer to it. So at the very least, you want to be sure to put enough in your 401(k) to take full advantage of any employer match.

Where to invest your savings

You need the long-term growth potential of stock funds so that you have a chance to boost the value of your savings over the next 15 years. But you also need some bonds so your nest egg isn’t totally devastated by market setbacks. There’s no single “correct” mix of stocks and bonds for someone in your position. But if you invest roughly 70% to 75% of your savings in stocks and the rest in bonds, that should give you the long-term growth you need while affording a bit of downside protection.

One caveat: Some people who are getting a late start on retirement planning are tempted to invest much more aggressively because they figure higher investment returns can compensate for their lack of savings and boost the value of their nest egg. Remember, though, that higher returns come with higher risk – and there’s no guarantee the higher risk will pay off. You could end up with lower returns and a smaller nest egg. So I’d be wary of dialing up your stock exposure much beyond the range I’ve indicated. (As I’d be wary of scaling back stock exposure, unless you’re willing to really ramp up the amount you save.)

As for how to put together this blend of stocks and bonds, you have several choices. You can put together a portfolio yourself with individual stock and bond funds, if you’re comfortable doing that sort of thing. Or you can buy a fund known as a target-date fund that does it for you. Just pick a target fund with a date that roughly corresponds to the year you plan to retire – say, 2025 in your case – and you’ll get a ready-made mix of stocks and bonds that’s appropriate for your age. The fund will also gradually shift a larger percentage of its assets into bonds each year so that the fund becomes less risky as you near retirement.

Of course, you also have the option of having a professional money manager create a portfolio for you, but that’s usually not very cost effective for someone just starting out investing small sums. That said, some 401(K) plans now offer a “managed account” option in which an investment firm essentially manages your 401(k) investments for you. Read more on this option and how it compares to target-date funds or just doing it yourself.

For now, though, the single important thing you can do to improve your retirement prospects is start socking away as much money as you can and keep it at year after year. Because if you don’t start some serious saving soon, all the decisions about where to save and how to invest your money won’t amount to a hill of beans – or result in much of a nest egg.