How to fund a mountain of cash for retirement

— -- A million dollars isn't what it used to be. Depending on your personal needs, having a million dollars may — or may not — be enough to retire on. But it's a pretty good goal for most people.

Short of striking oil in the backyard, how are you going to get your $1 million retirement kitty?

We can't make any guarantees, but a solid savings strategy, combined with smart investing, low taxes and lower expenses, will get you a long way to your million-dollar retirement account.

Start with saving. Over the long term, most of the money in your retirement savings will be the money you socked away.

Duh, you say. True enough. But even though most people intend to save, many don't. A survey by the Employee Benefit Research Institute found that 48% of those surveyed said the total value of their investments, excluding their home and pension, was less than $25,000. About 31% of workers over 55 said they had less than $25,000 in household savings.

The earlier you start, the less you have to save per month. If you have 10 years to retirement, you'll have to save $3,500 a month to have $1 million, assuming you earn 7% on your investments. If you start when you have 40 years to retirement, you need to save $400 a month.

You can start with less if you simply save a percentage of your salary every month. As your salary rises, so will the amount you save every year. For example, suppose you're 25, and your first job pays $35,000. You choose to save 5% of your salary every year, or about $146 a month. Assuming you get a 4% raise every year, and that you earn 7% on your investments, you'll have about $635,000 in your retirement savings in 40 years.

If you invest your savings in a 401(k) savings plan that offers a company match of, say, 50 cents on the dollar, you'll retire at 65 with $1.4 million.

Investing

The best way to get $1 million from the stock market, the saying goes, is to start with $2 million. And, in the short term, your odds of big gains in the stock market are modest at best. Over any one-year period since 1926, according to Ibbotson & Associates, a Chicago research firm, large-company stocks posted a gain 71% of the time. But they beat other investments, such as bonds and Treasury bills, just 20% of the time.

Over the long term, however, your odds improve considerably. Over any 10-year period since 1926, you would have made money 97% of the time. When you extend the holding period to 20 years, you would have made money 100% of the time.

Your mix of stocks and other investments depends on the amount of time you have before you'll need to spend your savings. If you're 45 years old or younger and you plan to retire at 65, you should invest nearly all of your retirement money in stock mutual funds.

As you approach retirement, you will need to add bonds, bank CDs and money funds, which will act as a cushion when the stock market tumbles.

Harold Evensky, a financial planner in Coral Gables, Fla., recommends a 45-year-old keep a simple, two-fund portfolio: 80% in the Vanguard 500 Index fund and 20% in the Vanguard Bond Index fund. As your account grows, you can diversify a bit by adding an international fund and a small-cap fund as well.

Taxes and expenses

Paying taxes is a bit like going to the dentist: painful but necessary. Unlike going to the dentist, however, it's sometimes wise to postpone your taxes as much as possible — or avoid them altogether.

Taxes reduce your returns, which makes it harder to hit your $1 million goal. If you earn 9% a year and your earnings are fully taxable at the 25% tax rate, your gain will be trimmed to just 6.75%.

The government, realizing that taxes can make it harder for people to save, has created several tax-deferred (and even tax-free) savings options for you. Your options, in the order you should fund them:

•401(k) plan. Evensky suggests starting with your company 401(k) savings plan, at least up to the company match, if your company matches contributions. Your contributions are tax-deferred until you start to withdraw them after age 59½.

•Roth IRA. Next, fund your Roth IRA, because it's so flexible, Evensky says. With a Roth, you pay taxes on contributions, but withdrawals are tax-free at age 59½, provided you've had the account for five years. You can withdraw your principal penalty-free at any time.

•Deductible IRA. Like a 401(k), your money is tax-free when you contribute but taxed when you withdraw it at retirement.

Try to keep as much of your bonds, bond funds and bank CDs in tax-deferred accounts as possible, because their interest payments are taxed at your regular income tax rate. Stocks and stock funds are taxed at lower capital gains rates when you sell your shares.

Drawbacks? You may not be eligible for a Roth IRA: Single people need adjusted gross income of less than $100,000 to make a full Roth contribution. If you have a pension plan at work, you may be ineligible for a deductible IRA.

Expenses, too, will slash your returns, so be sure to shield your savings from all the firms that would like to take a slice of it.

Index funds, which simply track a stock index, such as the Standard & Poor's 500-stock index, often have the lowest expenses. If you prefer actively managed funds, consider Selected American Shares slasx or Primecap Odyssey Growth pogrx, two excellent funds with annual expenses of less than 1%, says Kurt Brouwer, a financial planner in Tiburon, Calif..

Another way to reach a million? "Develop a plan and stick to it," Evensky says. If your plan requires you to increase your savings each year, make that a priority.

Do you save money for retirement? Would a million dollars be enough for you?