If you think of a contribution to your savings as a ‘bill’ that you pay every month along with your other expenses, you’ll be a much better saver with a much brighter future.

Question: My method for saving is to have my financial software program schedule a “bill” each month that represents a contribution to a savings account. When I pay my other bills, I’m automatically reminded to pay this one as well. This is working great, and I’ve finally acquired the cash reserve I’ve known I’ve needed for many years. Do you think this approach is fairly common? Any suggestions for how I might improve my system? —Earl R., Minneapolis, Minnesota

Answer: I don’t know how many people use an approach like yours. Judging by the low American savings rate, however, I think it’s safe to say it’s not all the rage.

But I think it’s a terrific system and I’ll bet that plenty of people would be a lot better off financially and have a much better shot at a secure retirement, if they followed your plan or something like it.

One of the things I like about your approach is that by dubbing your monthly savings contribution a “bill,” you equate it with regular living expenses, like paying the mortgage and utilities. And, in the largest economic sense, that’s what saving is. It’s a way to budget so we can meet future obligations when we don’t have a paycheck coming in, whether that’s during a layoff, a period of illness or in retirement. In short, you can think of saving as the bill we pay today to buy economic security for the future.

But I also think your system has more practical appeal - namely, it makes it more likely that you’ll actually save. To many people, savings is whatever money you have left after paying current expenses. Unfortunately, there always seems to be more expenses than income to pay them - even if some of those “expenses” are gadgets we might be able to do without or fancy options that boost the price of the car we drive or premium cable TV services that inflate our monthly cable bill. (Sorry, HBO. Even though you’re owned by Time Warner, the same company that employs me, I still believe most people would be better off if they spent less on cable and plowed more into retirement accounts.)

As for suggestions for improving your system, quite frankly I’m reluctant to recommend any changes. You’ve got a system you like, that’s easy to follow and, most important, that works. So why mess with success?

The only thing I’d say is that now that you’ve set up your emergency fund, your next step is to use your system to build an investment portfolio for retirement or for general financial security. You can do that by putting a few funds from our Money 70 list of recommended mutual funds on your monthly list of bills. Or for an even simpler approach, you could just steer your monthly payment into a target-date retirement fund that gives you a diversified portfolio appropriate for your age.

But I do have a suggestion for other readers who might want to improve on your approach. The one possible weak link in your system is that it still requires you to take action each month. You’ve either got to write out a check after your program reminds you of your savings bill. Or you’ve got to direct your program to pay the bill.

That may be fine for a conscientious fellow like you. But that one little extra step could be enough to sidetrack many of us.

So I propose a system that eliminates that extra step. How? Sign up for an automatic investing plan, a service that’s offered by most mutual fund companies. Once you set up this option, money is automatically transferred each month from your checking account to whichever mutual fund or funds you’ve chosen. You can find the minimum investment required to start such a plan with a specific fund at Morningstar.com.

By participating in such a plan, you’ll effectively have created something very similar to a 401(k), which automatically deducts contributions from your paycheck. Needless to say, if your employer offers a 401(k), you should be taking advantage of that too.

I recognize that putting your savings on autopilot may not appeal to some people. Fine. You’ve got to find something that works for you. In that case, you may want to “fool” yourself into saving or focus on ways you can carve some really big savings out of your budget.

Finally, if anyone else has some suggestions or uses a different system that’s effective, please share it. When it comes to saving money, most of us can use all the help we can get.

Currency trends can affect the yields on your international stock funds. Here’s how you can protect yourself.

Question: Does the low value of the U.S. dollar today compared to foreign currencies make investing in international stock funds less attractive than when the dollar is strong? —Larry Mulcahey, Bloomington, Illinois

Answer: The value of the dollar versus other currencies in and of itself doesn’t determine whether foreign stock funds are more or less attractive to U.S. investors like you.

What does matter, however, is whether the dollar rises or falls against currencies after you invest in a foreign stock fund. And there the relationship is clear, if somewhat counterintuitive.

If the dollar weakens after you’ve bought an international equity fund, the currency effect will act as a tailwind of sorts, boosting the foreign fund’s return. Conversely, if the dollar strengthens, the currency effect will work against you, lowering the return. (This assumes that the foreign stock fund you’ve bought doesn’t hedge against currency fluctuations. If it does, then the dollar’s movements will have little or no effect on your fund’s return.)

A quick example shows why this is the case.

Let’s say you invest $10,000 in an international stock fund that buys foreign company shares denominated in euros. Before the fund can invest your money, it’s got to convert your dollars to euros. Assuming the euro trades at $1.54 - which was the case recently - your ten grand would fetch 6,494 euros ($10,000 divided by $1.54).

If the value of the fund’s stocks rises 10%, you would have a gain of 649 euros, making your investment worth 7,143 euros. If the value of the euro remains the same, then translating your euros back to dollars would give you $11,000 (7,143 euros times $1.54), giving you the same 10% return in dollars that you got in euros.

But what if the euro rises in value to, say, $1.60 (which is the same as the dollar weakening)? Well, in that case your 7,143 euros would give you $11,429 (7,143 x $1.60), which translates to a 14% return in U.S. dollar terms compared to 10% in euros.

If, however, the euro falls in value (i.e., the dollar strengthens) to, say, $1.48, then your 7,143 euros would give you $10,572 (7,143 x $1.48), which means your 10% gain in euros would be whittled down to 5.7% in dollars.

I should note that this little scenario simplifies things in many ways. I’ve rounded the figures, limited the example to one currency, ignored currency exchange and transaction cost and I haven’t considered what effect economic trends beyond currency fluctuations might have on the relative values of U.S. vs. foreign shares.

But the basic idea is that if you buy a foreign stock fund and the dollar then weakens, you’ll get a boost to the return generated in foreign currency, while a strengthening dollar will lower your return.

The question is, how, if at all, should you factor this tailwind-headwind effect of currency fluctuations into your investing strategy?

Well, I suppose if you really knew that the dollar was going to drop further in value you could buy foreign stock funds or increase your existing position in them hoping to get a currency boost. Or if you thought the dollar was going to rebound, you could hold off buying foreign shares or trim your holdings. Or, for that matter, you could simply buy or sell foreign currencies.

But I think that’s a dicey game for individual investors. Sure, looking back it’s easy to see that the dollar has been on a multi-year slide against the euro and other currencies. But as the example above shows, it’s what happens from this point on that will determine whether currency trends improve or erode your return.

And that’s where things get murky. I don’t think anyone is predicting a big recovery in the dollar’s value anytime soon. But some observers of the international investing scene say that with the dollar’s value at or near historic lows and the Federal Reserve probably nearing the end of its rate-cutting phase, the dollar is likely close to a bottom and could even rebound a bit from here.

Others contend that underlying economic fundamentals - such as our hefty budget and trade deficits - argue for continued weakness.

My position? I don’t try to predict currency trends. Instead, I advocate allocating a portion of your stock portfolio to foreign funds for the long-term return and diversification benefit they can add to an all-USA portfolio, not as a currency play. Since foreign and domestic shares don’t always move in synch with each other, owning both can reduce the volatility of your portfolio without sacrificing long-term returns.

Reasonable people can disagree about how much of your portfolio you should devote to foreign shares as well as how you should get that exposure. I’ve suggested 10% to 30% as a guideline, and I think broadly diversified foreign stock funds and ETFs like the ones on our Money 70 list of recommended funds are the best way to go for most people, as opposed to buying funds that concentrate on specific countries or regions.

Whatever percentage you choose and whichever funds you buy, be sure to rebalance your portfolio once a year. This way, your foreign funds won’t become too large a piece of your holdings when foreign shares are booming (whether aided by favorable currency trends or not), or shrink below your target percentage when your U.S. holdings are churning out bigger gains.

So unless you believe you have unique insights into the currency markets and the economic trends driving foreign markets, I say it makes no sense to try to time your moves in and out of foreign stock funds to take advantage of currency swings. If you want to do so without such knowledge, that’s fine. But you’ll be speculating, not investing.

Even when markets are headed south, a 401(k) is a great vehicle for retirement savings.

Question: Is it still a good idea to contribute to my 401(k) right now even though the economy isn’t doing too well? -JoAnna Jones, Bossier City, Louisiana

Answer: Let me see, how do I say this to get across just how strongly I feel about this answer? How about: Definitely. No question. Positively. Absolutely. Without a doubt.

Or, to put it another way: Yes.

I can understand why you might feel anxious about contributing to your 401(k) account at a time when the national mood is so gloomy. It’s hard not to let the travails of the moment color your long-term planning.

But the fact is, when you invest money in your 401(k), improving your retirement prospects over the long-term should be your focus.

When you’re contributing to your 401(k) early in your career - say, when you’re in your 20s or 30s - you know that this money is going to be invested at least another 20 to 40 years. So as long as you’re investing in a diversified mix of stock and bond funds, it doesn’t make much sense to get caught up in the short-term ups and downs of the market.

If you’re on the verge of retirement, then clearly you’ve got to give more consideration to what might happen to the value of your account over the next few years. You don’t want to see your 401(k)’s value decimated by market setbacks on the eve of retirement.

But even then the answer isn’t to stop contributing. Indeed, the money you invest in the last few years before you call it a career may very well turn out to be the funds that will sustain you in the later stages of a retirement that could last 30 or more years. Rather, the way to protect your nest egg as you approach retirement is to gradually shift more of your 401(k) portfolio from stocks to bonds.

I realize, however, that concern about the short-term can often blind us to long-term considerations. So I’d like to offer three more immediate reasons why you shouldn’t abandon your 401(k) now.

You’ll be giving up a tax break, and possibly free money. One of the nice little advantages of participating in a 401(k) is that you get to invest pre-tax dollars, which lowers your current tax bill. What’s more, the investment gains on your contributions - as well as the gains on your gains - grow without the drag of taxes. Yes, you do eventually pay tax on this money at withdrawal. But years of tax-deferred compounding allows you build a bigger nest egg than you could with taxable accounts alone, which in turn allows you to live a more comfy retirement.

And if your 401(k) plan is among the majority that provides employer matching contributions - typically 50 cents for every dollar you contribute up to 6% of salary - then bowing out of your plan now is like giving up free money.

Walking away from these and many other benefits of 401(k)s just makes no sense, even if the economic outlook at the moment appears tenuous.

You may be foregoing attractive returns. There are no guarantees when it comes to the financial markets. But there’s a good chance that the money you invest in your 401(k) when the markets are struggling will give you some of the highest returns you’ll earn over the long run.

This is a somewhat counterintuitive concept. People tend to feel most comfortable about investing after the markets have been on a roll and have racked up big gains. But the exuberance that naturally occurs during bull markets eventually leads investors to bid up share prices to blimpish levels. That diminishes the potential for future gains much the same way that overpaying for a house does.

When things are looking more bleak and investors are wary, on the other hand, share prices are generally lower relative to companies’ long-term earnings power. That translates to a greater potential for higher long-term returns than when things are going swimmingly.

I’m not suggesting that 401(k) investors should try to time their contributions to any particular market outlook. That would be foolish. But at times like today when pessimism is pervasive, it’s not a bad idea to remind yourself that the money you contribute when your fellow investors are most skittish often ends up racking up higher returns.

You might not resume contributing if you stop now. Another nice advantage of contributing to a 401(k) is that it forces you to live a bit below your means. Your contribution comes out of your paycheck before you get your hands on it, so your spending naturally conforms to what’s left - that is, your income after you’ve allowed for saving.

If you suspend your 401(k) contributions, however, you’ll be giving up this little psychological advantage. Your paycheck will be larger, thus freeing up more money for you to spend. Even if you plan on resuming your contributions when the economy improves, doing so may be more difficult than you think, especially after you’ve gotten used to having that extra money to throw around. It’s always harder to scale back your lifestyle than it is to ratchet it up. So I think there’s a real danger that what you intend as a temporary hiatus from your 401(k) could turn into a long-term absence that seriously impairs your retirement prospects.

Bottom line: It’s challenge enough to create a retirement nest egg these days even if you contribute faithfully to your 401(k) throughout your career. Start moving in and out of your plan based on how you feel about the economy and that challenge could become a mission impossible.

With inflation outpacing yields on savings and money market accounts, what’s a saver to do?

Question: I understand that you should have at least three months’ living expenses in a reserve account. But the interest rates available on savings and money-market accounts are so low that you end up losing purchasing power after inflation. Long-term CDs aren’t an option for cash reserves because you’d have to pay a penalty to get to your money and bonds have too much interest-rate risk. So what’s a person to do with his rainy day fund at a time like this? -Jeffrey Utech

Answer: I hear you. Last week, in their ongoing attempt to breathe life into a sagging economy, Federal Reserve chairman Big Ben Bernanke and his merry band of Open Market Committee members cut the target rate for federal funds for the seventh time since September, lowering it to just 2%.

As a result of those moves, short-term rates on everything from bank savings and money-market accounts to money-market mutual funds have been on a downward slide the past eight months and now average less than 2.5%. Inflation, meanwhile, has been cruising along at an annualized rate of 3.1% the first three months of this year. So it’s no wonder you have the feeling of being on a treadmill that’s going faster than you can run.

But as disconcerting as it is knowing that your savings stash is losing purchasing power at the moment, you’ve got to be careful not to make any rash moves that could make the situation worse.

After all, the primary purpose of a cash reserve is to be available when you need it. You want to be able to get at this money immediately without paying a significant penalty. And you don’t want to worry that some of it won’t be there when you need it because the market has taken a nosedive or interest rates have spiked. So that pretty much limits you to savings accounts, money-market funds and short-term CDs.

Naturally you want to earn a competitive return on these vehicles, which you can do by sticking to money-market funds with the lowest expenses and shopping for accounts with the most attractive rates.

Similarly, you’ll want to consider whether, depending on your tax rate and the relative yields on taxable and tax-free funds, you can do better in a tax-exempt fund. As of last week, average yields for tax-free money-market funds were around 2%, which for someone in the 25% tax bracket translates to a taxable equivalent of 2.7%. That’s a half percentage point or more than the average taxable money fund was paying.

But you don’t want the desire for higher yields to take you into investments that are inappropriate for cash reserves. So whenever I hear people talking about supposedly savvy ways to get “safe” high yields or returns - buying tax liens, foreign bank CDs, various types of annuities that carry high surrender fees, etc. - the first thought that pops into my mind (and I think should pop into theirs too) is whether you want to take a chance with money you need to be as secure and liquid as cash.

I believe the answer is no. And I think the experience of people who lost money in supposedly secure subprime mortgage-related investments and found themselves locked into auction rate preferred securities that were touted as substitutes for money funds illustrates the perils of reaching for yield.

I realize that this means there may be periods when you have to accept puny returns on your cash reserves, maybe even returns that lag inflation. But you’ve got to work with what the market delivers. You can’t just manufacture the returns you would like to receive, at least not without subjecting yourself to greater risks.

Of course, you can and should be willing to accept more risk for the possibility of higher returns in the investment portion of your portfolio - that is, the assets you’re investing for the longer term. And, indeed, it’s that part of your holdings - not your cash reserves or rainy day fund - that you’re relying on to keep your purchasing power ahead of inflation.

When it comes to your cash reserves, however, safety of principal is your main goal. So resist the urge to stretch for higher, riskier yields and instead stick to secure short-term savings vehicles, even if they’re currently paying puny yields. Rates will eventually tick up again. And when they do, you want to be sure your rainy day fund will still be around to take advantage of them.

Got a question? Ask the expert.

There are many factors that will help you determine whether you’ll be able to retire early. Here’s how to figure it out.

Question: I’m 50 years old, my wife is 44 and we would like to retire by the time I’m 55, if not sooner. We have a little over $600,000 in 401(k)s, IRAs and other retirement accounts and another $250,000 or so in stocks, mutual funds and cash that we can draw on once we retire. Our mortgage will be paid off shortly and we have no other debt. Do you think we can pull off early retirement? —Anonymous

Answer: The fact that you’ve saved a considerable sum and aren’t going into retirement saddled with debt, certainly increases your chances of being able to retire early.

Still, I can’t give you a definitive answer to your question. I would have to know a whole lot more about your finances to even begin to take a reasonable stab at it.

But I can tell you how to assess your situation so that you can figure out on your own or with help from an adviser whether it’s realistic for you to call it a career within the next five years.

As I see it, you’ve got to size up your shot at an early retirement from two different perspectives - a financial and a lifestyle point of view. The two are related, of course, but we’ll tackle them separately, starting with the financial side.

Whether you’re evaluating your prospects for retiring early or at a normal retirement age (whatever that may be), the fundamental financial question you face is this: Can the retirement savings you’ve accumulated in 401(k)s and other accounts generate enough sustainable income combined with Social Security and any pensions to support you for the rest of your life?

You’ve provided a rough sketch of one aspect of your finances - namely, the assets that you can draw on during retirement. But in order to tell whether that nest egg is sufficient, you’ve also got to consider the other side of the ledger, which you haven’t mentioned - i.e., expenses. You need to know how much money you will need on an annual or monthly basis to live comfortably once you’ve left your job.

I’m not talking about a guesstimate here. I’m talking about putting together a detailed retirement budget that lays out the actual expenses you’ll face at the time you retire and projects your likely spending even into the later years of retirement. Only after you do that can you judge whether the size of your savings stash will be large enough to support you throughout a retirement that, in the case of you and your wife, could last upwards of 40 years.

Unless you’re some sort of a math wiz, this isn’t an assessment you can do with a pencil and paper. There are too many variables and uncertainties. So you have two options: go to an adviser who can crunch the numbers for you, or run the numbers yourself using an online calculator, such as Fidelity’s Retirement Income Planner. One of the features I like about this tool is its interactive budget worksheet that allows you to break down your spending into nearly 50 different categories. You can even assign different rates of inflation to different expenses if you think, say, your health care costs will rise faster than what you spend on travel. What’s more, you can even budget for expenses that you know will disappear at some point in the future, such as a car loan or home equity loan that you’ll pay off.

By plugging in this information along with details on your retirement investments and other resources plus an estimate of how long you’ll live (I generally recommend planning at least until your early ’90s), you will come away with a forecast of how many years your savings and other income sources will likely support you.

Pitfalls of retiring young

It’s important to remember, though, that early retirement presents some special challenges. If you retire at 55, you’ll have at least seven years until you can begin collecting Social Security. That means you’ll be relying more heavily on your savings in those early years, which increases the possibility of going through your nest egg too soon.

You also can’t qualify for coverage under Medicare until you’re 65. That may not be a problem if you can count on retiree health coverage from your former employer. But less than a third of companies offer this benefit. So although you may qualify for coverage under COBRA for a while, chances are you will eventually have to buy your own health insurance policy. You’ll definitely want to price private policies so you know ahead of time how much of your budget you’ll have to devote to this expense.

Then there’s the issue of whether you can access the money in your tax-deferred retirement accounts without paying a 10% penalty in addition to the regular income tax you must pay. If you’ve retired from your job and you’re 55, you can tap your 401(k) money without being hit with a penalty, but there’s still the practical issue of what options your ex-employer offers to retirees for getting to those funds. (Can you pull out money whenever you like as often as you like, or are there restrictions?)

As for your IRA, a 10% penalty generally applies to withdrawals you make before turning 59 1/2. You can sidestep the penalty by taking “72(t)” withdrawals - essentially, substantially equal periodic payments based on your life expectancy. But the rules governing these payments can be complex and a bit of a hassle. Be aware too that there are unscrupulous advisers out there using the bait of penalty-free 72(t) withdrawals to lure people into high-priced investments and even fraudulent investing schemes.

So to the extent you can, you’ll probably want to tap taxable accounts early in retirement and let those tax-deferred babies continue to compound without the drag of taxes.

Lifestyle planning

Now to the lifestyle issue. Regardless of your retirement age, it’s always a good idea to do a little “lifestyle planning” before leaving your job. What sorts of activities will fill your days once work isn’t there to provide structure? Where will you live? Will you work part-time? Maybe move in and out of the workforce? Do volunteer work?

But these sorts of issues are especially important for anyone contemplating early retirement. After all, someone who’s 55 still has plenty of life to live, things to accomplish and lots to contribute. (At least that’s what this 55-year-old thinks.) So I’d be surprised if you’re going to devote yourself solely to leisure activities for the next several decades. More likely, you’ll want to engage in some sort of work - maybe try a new occupation or start your own business or just pick up jobs occasionally to keep yourself engaged.

And this is where the financial and lifestyle aspects of retirement intersect. If, after doing the sort of analysis I described above, you find that early retirement looks a bit iffy, a few lifestyle adjustments might increase the odds of it panning out. The extra bucks you earn from taking a part-time job early in retirement, for example, could allow you to cut back on drawing from your savings enough to significantly boost the number of years your money will last.

And although finding a retirement job that offers health benefits is no cinch, you might be able to find one that at least allows you to pick up coverage at a group rate that’s lower than what you’ll pay for a private policy.

Bottom line: Determining whether you can pull off early retirement is a financial issue, but your willingness to be flexible in terms of your retirement lifestyle also plays a key role. So start taking a hard look at both those areas now. The sooner you do, the sooner you’ll see whether an early exit is a real possibility, and the more time you’ll have to make any adjustments you might need to make to turn your early retirement dream into reality.

Got a question? Ask the expert.

Wondering where to put that extra cash? Before you buy a flat screen, try these suggestions and improve your long-term financial well-being.

Question: I’m thinking of using my stimulus check to make my home more energy efficient. Do you think this is wise choice, and do you have suggestions for other ways to use this extra money? -D.D.

Answer: I’m glad you asked because in a rare display of bureaucratic efficiency, it appears the federal government is actually getting those economic stimulus payments out ahead of schedule.

Which means two things:

First, you may find yourself on the receiving end of a check or direct deposit from the IRS of anywhere from $300 to $1,200 (plus a possible $300 per qualifying child) sooner than you think, if indeed you haven’t gotten the payment already. (The IRS Web site has a calculator that estimates your payment.)

Second, it means that people in the more than 130 million American households eligible for these payments will soon be asking themselves much the same question you pose: What should I do with this little windfall?

Well, the honchos down Washington - not mention the nation’s retailers - are hoping you’ll quickly spend this manna from DC and in so doing, rejuvenate the flagging economy. And if that’s what you’ve decided to do with this extra cash - or, given the rising price of food and other living expenses, that’s what you have to do with it - fine.

But if you’re in a position to do otherwise, I don’t think it would be unpatriotic to use this money to improve your financial prospects.

Certainly your idea of using the stimulus rebate to boost the energy efficiency of your home in the face of increasingly burdensome energy costs can be one way to both spend and invest your money, although I caution you that there are also plenty of people out there touting all sorts of energy-saving home improvements and products that may take decades to generate a decent return.

Keep in mind that the extent to which those savings enhance your financial security depends on what you do with the extra cash. If lower utility bills allow you to increase your contributions to a 401(k), that’s great. If the savings end up going to more lattes, then I’d say the long-term benefit is more tenuous.

So if you’re looking to really turn this bonus of sorts to your financial advantage, I’d be more inclined to consider moves where the payoff is more direct and easily quantified. Here are some suggestions.

Pay down debt. It’s no secret that a rising tide of borrowing helped fuel the last economic boom - and contributed to its demise. So if you went a little crazy during the good years and piled on too much credit-card, home-equity or other debt, this rebate check could be a good way to lighten the load.

To get the biggest bang for your loan-repayment buck, start with debt that carries the highest rate (most likely credit cards, which charge an average rate of 12%) and then move on to lower-rate loans.

Of course, this move will pay off even more if you keep your debt under control once you’ve pared it down. You can then apply the money that used to go toward repaying loans to one of options below.

Build an emergency reserve. With the economy flagging and it looking more and more like we’re sliding into recession, it’s even more important than usual to have a cushion of ready cash equal to three months’ of living expenses that can help tide you over a layoff or other financial setback. If you don’t have such a reserve, your stimulus payment can be your first step to building one.

Remember, this is money you have to depend on in a pinch, so you want to keep it in a secure place where it won’t get hammered if the financial markets head south. For the most part, that means keeping it in a short-term bank CD or a money-market fund run by a well-known investment firm. You can check out CD rates and compare yields on money-market funds on sites like Bankrate.com.

Invest it. If you’ve got your debt under control and have a decent emergency fund, then why not use this government grant of sorts to either start an investing program or add to one you already have? You don’t have to do anything fancy. Indeed, given the recent experience of how supposedly sophisticated investors got tripped up by securities backed by subprime debt, I think simpler is better.

There are no guarantees, of course, but if you stick with a mix of low-cost mutual funds with solid track records like the ones you’ll find on our Money 70 list of recommended funds, you should do just fine.

Invest it in an IRA. As long as you’re investing your check, why not consider investing it in an IRA and improve your retirement prospects at the same time? And assuming you qualify you can also get a nice tax deduction (if you do a traditional IRA) or enjoy tax-free withdrawals down the road (if you opt for a Roth IRA).

And you may be able to cash in on another tax bennie. If your income falls below certain thresholds, the Saver’s Credit program can provide a tax credit of up to 50% of your contribution to an IRA or other retirement accounts up to a maximum credit of $1,000 for singles or $2,000 for married couples. And yes, this credit is in addition to the regular tax benefits IRAs and other retirement accounts offer.

Finally, at the risk of sounding preachy, I’ll throw out one more idea. If your finances are pretty solid, you might want to consider donating a portion of this money that you weren’t expecting (at least not until recently) to a charity or a cause that you feel deserves your support. That may not improve your financial well being like the others I’ve suggested, but you may collect dividends in other ways.

Got a question? Ask the expert.

No one can predict what the future holds, so you might be better off hedging your retirement by tax diversifying.

Question: I’m 33 and have invested in a Roth IRA for 13 years. This is my only retirement account as I don’t have access to a 401(k). With all the talk of a flat tax and other tax reforms, it seems possible that by the time I retire the income tax could be less of a hit than it is currently. So do you think it would make sense for me to split my IRA contributions between traditional and Roth IRAs? —Michael, Portland, Oregon

Answer: Let me start by saying that I have no special insights into what type of income tax regime a future administration might propose and that Congress might enact.

I suspect that given how entrenched the current tax system is and how many different interest groups have a stake in keeping the status quo that the chances for a radical overhaul are slim. And given the looming shortfalls in programs like Social Security and Medicare, I would also expect that if we do stick with the current system that tax rates would more likely rise than fall in the future.

But I freely admit that I could be underestimating the will for changing a system that is far too complicated, subject to all sorts of manipulation and, perhaps worst of all, wastes an astounding amount of resources when you consider all the time and energy spent by people either trying to comply or evade its provisions.

So for all I know, maybe we could eventually end up with a flat tax with a lower rate than many people pay today but with fewer deductions. Or perhaps we’ll get the “fair tax” system that taxes consumption. Or maybe Congress will pass a “Just send us your paycheck, we’ll take what we need and send you back the rest” tax. (Okay, I made that last one up.)

But even if some crystal ball could tell you what sort of system we’ll have in the future, I doubt that it would also be able to foretell all the details that will eventually determine the rate you’ll pay - what sorts of exemptions and exclusions might apply or what length of transition period we might have.

So what does all this mean for your situation?

Well, as I’ve noted before, although there are some additional wrinkles involved in deciding between a regular IRA and a Roth (or a regular 401(k) and a Roth, for that matter), you’re generally better off doing a Roth if you expect to be in the same or higher tax bracket when you withdraw your money, while the regular IRA is generally the better deal if you expect to be in a lower tax bracket at withdrawal compared to when you put your money in.

But given how difficult it is to forecast future tax rates, I wouldn’t want to put all my money behind the assumption of higher or lower rates. Which is why I advocate “tax diversification.” The idea is that, come retirement time, you want some money in tax-deferred accounts that will be taxed at ordinary income rates. Some in Roth accounts that will be tax-free. And while you’re at it, I think it’s a good idea to have some investments in taxable accounts that are subject to the long-term capital gains tax rate.

I’m not saying this strategy is foolproof. I don’t for a minute underestimate Congress’s inventiveness when it comes to ways of squeezing more revenue out of us. But you can’t cover every contingency, and I believe the approach above is a reasonable one given your options. All of which is to say that I think your instinct to hedge your bets by having money in both a Roth and a traditional IRA is a good one.

There are any number of ways you might pull off this strategy, and I’ve laid out one method in a previous column. In the case of a person like you who is young and presumably has decent prospects for a rising income, I’d probably be more inclined to stick to the Roth for now on the theory that you still have plenty of time to build tax-deferred accounts. You can always fund a regular IRA later if you’re in a higher tax bracket. Or you may have an opportunity to fund a tax-deferred 401(k) later on if you switch jobs.

But if you’re anxious about having your entire retirement stash in a Roth and would like to start this process of diversifying your tax exposure sooner, I think that’s a perfectly reasonable decision as well. Essentially, it’s a judgment call.

Ultimately, you have no control as an individual over what tax system or tax rates you’ll face in the future. But you do have control over how much you save.

So whatever you do, make sure that you continue to fund some sort of IRA to the max every year. Otherwise, your nest egg may not be large enough to support you in retirement whatever your tax rate turns out be.

A variable annuity inside of an IRA is usually not a good move. But there are a few ways to get out.

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Question: On the recommendation of my financial adviser, I recently moved my 401(k) into a variable annuity within an IRA rollover account. I now know that this was not a great move. But I’m not sure how to get the money out of the annuity, nor do I know what doing so will cost me. What should I do? —Gregory P.

Answer: When it comes to financial products that are sold via dubious sales pitches, annuities rank right up there at the top of the list.

You’ve got one group of salespeople out there pushing all manner of questionable annuities to seniors at free lunch seminars, a tactic I’ve warned about for years and that the people at Dateline NBC recently covered in a hidden-camera investigation.

And then there are advisers trying to convince people like you that instead of simply moving your 401(k) funds into an IRA account funded with mutual funds or ETFs, you’re better off putting your 401(k) money into an IRA rollover and investing the funds in a variable annuity.

That’s not to say that an annuity can’t be a reasonable investment for IRA rollover money. For example, I’ve long suggested that a plain old immediate annuity – a.k.a an income or payout annuity - can be a reasonable choice when you’re retired or on the verge of retirement and you want to assure that you’ll have income for the rest of your life. At that point, depending on your situation, it can make sense to invest a portion of your 401(k) or IRA stash in this type of annuity that’s still held inside an IRA account.

But many advisers these days want to get your IRA rollover money into an annuity well before you need regular income. On the face of it, though, that makes little sense. True, investment gains aren’t taxed as long as they remain inside the annuity. But money within an IRA is already sheltered from taxes, so you don’t need the tax-deferral benefit of an annuity when you’re dealing with IRA funds.

So instead advisers typically make the case for holding a variable annuity within an IRA by touting a variety of riders and special features, including the GMIB (guaranteed minimum income benefit) or the GMWB (guaranteed minimum withdrawal benefit). But as I’ve noted before, annuities that include the GMIB or GMWB feature have several drawbacks, including poorly disclosed annual fees that often top 2% a year. That sort of expense drag can limit the growth of your nest egg during your career and impair its ability to generate retirement income that will stand up to inflation over the long term.

Which brings us back to your situation: How do you get your IRA money out of the annuity?

Since the annuity is in an IRA account, you should be able to move your money without triggering any taxes by doing a trustee-to-trustee transfer to a new IRA rollover account. You could then invest in something other than an annuity.

But there’s a hitch. Nearly all annuities have surrender charges. These charges usually start at 7% to 10% a year and gradually decline until they disappear in eight to 10 years, although they can be higher and last longer. (In the case of a variable annuity, these charges are spelled out in the prospectus. In other annuities, you can check the contract.)

You may be able to sidestep these charges by invoking the annuity’s “free look” period - that is, a specific time during which you can return the annuity, typically for its contract value or your original contribution. Unfortunately, that period is usually only 10 days, although it can be longer in some states. (To see how long you have in your state, ask your state insurance department.)

If the free-look has expired, there may be another way for you to transfer at least some of your money into another IRA account without incurring onerous surrender fees. Most annuities allow you to withdrawal a certain amount each year (usually 10% of your account value) without paying surrender charges. The specifics are spelled out in the prospectus or contract.

So by taking advantage of this “surrender free” option, you can at least start moving some of your money out of the annuity into another IRA account and then transfer the remainder when the surrender charges have disappeared or at least dropped to a less burdensome level.

Of course, you could also go back to the adviser who sold you the annuity, explain why you think it was inappropriate and simply ask him or her to reverse the transaction without penalty. I doubt that this will work, but it can’t hurt to try.

If you really feel that you were duped or misled in some way, then I definitely think you should complain to the regulators who oversee annuities and annuity sales. That would be the Securities and Exchange Commission, FINRA, your state securities regulator and your state insurance department.

Even if doing this doesn’t help you, your grievance along with the complaints of others might lead to tougher oversight of annuity sales so that fewer people will find themselves in your position in the future.

Got a question? Ask the expert.

Don’t lose faith in your planner just because he keeps you invested in a down market. Ask yourself these questions first.

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Question: I saw many signs in 2007 that indicated that this would be a tough year in the market. But when I mentioned my concerns to my adviser, he resisted my suggestion to move into more conservative investments. His recommendation has cost me a lot of money, so I’m wondering: Should I stick with an adviser who only seems to have a pat answer of buy and hold? Shouldn’t he be managing my investments and giving me advice based on market conditions? –Rod G., Lexington, Ohio

Answer: First, let me say that it’s not at all clear to me that your adviser has done anything wrong. Frankly, I’m more suspicious when advisers are eager to dump existing investments and buy into new ones. After all, making more buy and sell recommendations is usually in the adviser’s financial interest, since more moves can generate more commissions, or at least make it appear that the adviser is on top of the situation.

So the fact that your adviser didn’t play yes-man to your urge to move into more conservative investments doesn’t automatically suggest to me that he’s incompetent or lazy. Quite the opposite. As long as you were going into 2008 with a reasonably diversified portfolio that made sense given your particular situation, then it seems reasonable to me that he would want to caution you against making any big moves.

That’s not to say that an adviser shouldn’t be ready to re-evaluate a strategy in light of market conditions, and perhaps even make changes. But I think a big part of an adviser’s job is also preventing clients from acting on whim or emotion.

Oh, but I forgot. You saw “many signs” that 2008 was going to be a bad year. Please. The world is full of people who, with the benefit of 20/20 hindsight, knew that the market was headed for a crash in 1987 or that dot-com stocks would melt down in 2000 or that the real estate bubble would burst in 2007. Of course, we rarely hear about the other calls these prescient investors made that turned out to be false alarms.

You say you want “advice based on market conditions.” But it seems to me you really want your adviser to predict the future. That’s unrealistic. No one can do that consistently. And if your adviser did offer a warning of an impending downturn, moved you into more conservative investments and that prediction turned out to be wrong, I suspect that you would be howling about the money you lost from being out of the market.

All of which is to say that I think you need to re-think what to expect from an adviser and how to evaluate your adviser’s performance. Here are three questions you can ask yourself to help you do that:

Have you and the adviser talked about why you’re investing?

I got a kick out of a cartoon that ran in The Wall Street Journal last week showing a broker asking his client, “Are you investing for growth, wealth preservation, income or excitement?”

Funny, yes, but it raises an important point. You can’t invest in a vacuum, at least not sensibly. To choose appropriate investments and assemble a reasonable portfolio, you’ve got to have a goal or objective in mind. (And, no, big gains with low risk is not a bona fide goal.) If your retirement is 20 years away, you’ll take a much different approach than you would if you’re going to be calling it a career in a couple of years.

Your adviser should be talking to you about your goals as well as how much risk you’re willing to take in order to reach them and how you might react to market setbacks along the way. If you haven’t had this sort of discussion with your adviser - and if you don’t touch base periodically to re-assess your situation - then I don’t see how an adviser can make sensible recommendations.

Has your adviser set a coherent strategy?

Once your adviser has a good sense of your goals and risk tolerance, he or she can set a reasonable strategy. The foundation for that strategy should be a diversified asset mix that includes a variety of different stocks (large, small, growth, value, domestic and foreign) or stock funds and bonds or bond funds.

The idea is that the mix of assets should be designed to give you a good shot at the returns you’ll need to reach your goals with a level of volatility that’s acceptable to you. While the adviser can’t guarantee performance, he or she should be able to give you a reasonable forecast of how that portfolio might perform over the long run and at the very least tell you how that mix has done in good and bad markets in the past.

I’d also want the adviser to go beyond pure investment advice and help you look into such issues as whether you’re saving enough, whether you’re taking full advantage of tax-deferred accounts like 401(k)s and IRAs and, if you’re retired or nearing retirement, the odds that your nest egg will be able to support you throughout your golden years.

Does your adviser provide regular updates on how you’re doing?

No strategy is going to go exactly according to plan. So your adviser should be providing periodic reports - quarterly seems reasonable to me - that show you how you’re doing versus an appropriate benchmark. If your portfolio’s performance is out of line - either above or below its benchmark - then your adviser should explain why this is the case and you should both discuss whether any changes or tweaks are needed.

A good adviser should also know, however, that market turmoil will naturally upset many investors and lead them to wonder whether they’re still on the right course. So aside from scheduled updates, an adviser should make a special effort to keep in touch during especially chaotic periods.

It’s not enough at times like this for an adviser to say “hang in there and all will be well.” An adviser should be ready to go over the strategy again, make sure it’s still appropriate for your situation and, most important, explain to you why the strategy still applies even if it’s losing money at the moment.

If something about your situation has changed or if it turns out you drastically overestimated the level of volatility you can stomach, then it could make sense to fine tune and perhaps re-jigger your portfolio. Remember, though, if you’re constantly making changes, then you probably don’t have a real strategy anyway. You’re winging it.

If, after asking yourself these questions, you decide your adviser comes up short, then fine, go look for a new one. But if you’re going to jettison him because he can’t predict the future, good luck in your search for a replacement, because I don’t think you’ll find anyone who’ll measure up.

Got a question? Ask the expert.

You don’t have to be Warren Buffett to secure a decent nest egg. Saving early and often is more important than picking the right investments.

Question: I will be graduating from college in May and starting my first full-time job. I want to start saving correctly so I can prepare for my future. What is the best way to do this? —Matt, Lansing, Michigan

Answer: Before I give you an answer, let me just say that I love your question. Why? Well, most people looking for advice about saving for retirement or achieving financial security immediately begin asking about investing. How can I find the best stocks? Which mutual funds should I buy? Foreign stocks or domestic? Taxable bonds or munis? Real estate or gold? The presumption is that the road to wealth and security starts with picking the best investments.

You, on the other hand, are seeking advice about the true way to improve your odds of achieving financial security: adopting a disciplined savings strategy. I don’t want to suggest that investing isn’t important. Clearly, you want to earn a decent return and see your money grow. But what you really need to rev up the engine of wealth generation is regular saving. If you don’t have a decent sum to invest, then all the investing savvy in the world, to paraphrase Bogey in Casablanca, won’t amount to a hill of beans.

Indeed, researchers at Putnam Investments did a neat study a couple of years ago that illustrated this simple truth. They created a hypothetical “Average Joe” who not only contributed very little to his 401(k) but also had the misfortune of investing too conservatively and being a lousy fund picker to boot. They then examined the effect that a better asset mix, wiser fund choices and a higher contribution rate would have on his 401(k) balance. Each move increased his account’s value. But contrary to what most people would expect, the biggest boost came from plowing more dough into his 401(k).

Unfortunately, many people don’t seem to grasp the concept that it’s all got to start with saving. So instead of living on less than they earn and sock away money on a regular basis, they live large, run up their credit card debt, borrow against their home equity - and then obsess about getting a high return on their paltry savings.

Which brings me back to you. You seem to get it. Your question suggests that you understand that to assure your financial future you’ve got to get into the habit of regular saving today.

So how do you do that?

The single best way is to sign up for your 401(k) or similar plan at work. The beauty of workplace retirement savings plans is that they make saving automatic, which allows you to set the money aside before you get a chance to spend it. Whether your company offers a regular 401(k) or a Roth version, sign up and then try to contribute at least enough to take full advantage of any employer match.

One caveat, though. More and more 401(k) plans these days automatically put you into the plan. That’s good, especially for young people like you who are more likely to skip enrolling since retirement seems like a far-off mirage. But the default contribution rate may be something like a measly 3% to 6%. You’ll probably want to do more. Consult an online calculator if you’re not sure how much.

If you don’t have access to a 401(k) or similar plan - or you want to save more to increase your odds of achieving financial security - you can sign up for an automatic investing plan at most mutual fund firms. You agree to have a certain amount - say, $50, $100, $500, whatever you can afford - transferred from your checking account into your fund account each month. You can do this with a fund that’s part of a traditional IRA or Roth IRA account (assuming you qualify, or you can invest in a fund in a plain old taxable account.

Now, if you’re one of those types who is motivated enough to sign up for your 401(k) or open up an automatic investing plan simply because you know it’s the right thing to do, good for you. But some people need more incentive. Some of us may even have to resort to fooling ourselves into saving. If you’re one of those people, you may want to check out some additional savings techniques I outlined in a recent column. Some of these techniques are a bit, shall we say, unconventional, like creating a contract to save a certain amount each month and agreeing to pay a penalty of $100, $500 or whatever if you don’t reach your target. But sometimes you gotta do what you gotta do to sock those bucks away.

Again, I don’t want to suggest that you should ignore investing. But all you really need to do to succeed on that front is settle on a reasonable asset mix, invest in some decent low-cost funds like those in our Money 70 and then make sure you don’t sabotage yourself by buying into the fads and gimmicky products that Wall Street specializes in churning out.

So start saving early and often. If you do that, financial security will follow.