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Three commandments for successful retirement investing

To protect your retirement savings and achieve your retirement goals, follow these three commandments:

• Know thyself
• Know thy plan
• Diversify!

Know thyself
How many years do you have until retirement? What do you want to do during retirement? How comfortable are you with risk? Answering questions like these will help you determine how much to set aside for retirement and how to invest it. Use calculators like the ones at www.principal.com/calculators to make the task easier.

Find out what kind of a match your company provides, and be sure to defer enough to take full advantage of that match.

Know thy plan
Learn the ins and outs of your company's retirement plan. Read the educational materials your 401(k) provider offers. Review the investment options available to you. Find out what kind of a match your company provides, and be sure to defer enough to take full advantage of that match.

If company stock is one of your investment options, consider the level of risk of that stock and how it will fit within your portfolio. Find out if your plan requires that certain contributions (such as employer match) are made in company stock, and if the plan restricts investment changes unless certain conditions are met (such as years of service, age, etc.). If your ability to change investment direction is restricted, make sure to look at your overall asset allocation.

Diversify, diversify, diversify!
A crucial step to investing for retirement is diversifying, or spreading your money out over different asset classes like stocks, bonds and short-term investments. Also, be sure to diversify within each asset class. For example, don't invest the stock portion of your portfolio in a single fund (and definitely not in a single stock!). Instead, choose a mixture of funds representing companies of different sizes and different industries. This will give you the potential for the best return over time, as well as protect you from risk.

Retirement Plan Options for Sole-Proprietors

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• Profit sharing plans provide impressive contribution flexibility of 0 to 25% of eligible employee compensation or $40,000, whichever is lower. This is a solid option for any small business owner, especially for someone who earns more than $160,000 and wants a defined contribution plan. Contributions are tax deductible for the business; contributions and earnings are tax deferred for employees, including the business owner. (Note, the contribution limit is adjusted annually, and will increase to $41,000 for 2004.)

• SEP-IRAs are similar to profit sharing plans but are less expensive and less complicated. These plans allow for contributions of up to 25% of compensation, and they typically have extremely low administrative fees.

• SIMPLE-IRAs are a good choice for business owners who are taking a relatively small salary (up to $55,000). Adding employees to a SIMPLE-IRA is very affordable. For example, The Principal SIMPLE-IRA costs as little as $15 per year for each participant, and that amount is usually paid by the employee. The Principal^® also offers online processing of SIMPLE IRA contributions, which eliminates the need for paper, checks and mail time.

• Defined benefit plans are a good option for high-earning employers over the age of 45.

• Individual 401(k) plans are now very attractive for one-person businesses because of the new federal tax law. By combining new provisions in the law, owners can dramatically increase the amount of their contribution to a 401(k). The owner can contribute 25% of pay on top of making the new maximum $12,000-a-person deferral in 2003 ($13,000 in 2004). The total contribution of the plan is limited to $40,000 ($41,000 in 2004). It's important to note that if another employee is hired, the owner's contributions and the complexity of the plan change dramatically.

• E-401(k)'s are a low cost, highly convenient option for tech-savvy owners who believe they will hire employees down the road. For example, Impact401k.com^®, offered by The Principal, allows owners to build-their-own plan and add employees online. As a result, fees are lower than a traditional 401(k).

For additional information or to arrange an interview with an expert from The Principal, please contact Susan Houser, 515.248.2268, houser.susan@principal.com or Terri Hale, 515.283.8858, hale.terri@principal.com.