Using variable and equity-indexed universal life insurance policies as retirement vehicles is expensive and complicated, and probably not worth the trouble.

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Question: What do you think about VULs and EIULs as retirement plans? --Liz G., Downey, California

Answer: My short answer: not much.

That’s not to say that I couldn’t imagine some circumstance in which you might consider them. But they would be way, way, way down on my list of retirement-planning options, something I wouldn’t even contemplate until I’d thrown every possible cent into tax-advantaged plans like 401(k)s, IRAs and the like, and until I’d also funded options like low-cost index funds or tax-managed funds in taxable retirement accounts.

And even then I’d be extremely hesitant to get involved with these plans.

Before I tell you why I’m so wary of them, however, let me first explain to readers who are unfamiliar with VULs and EIULs just what they are.

Although they’re often referred to as retirement plans, in fact these are nothing more than insurance policies, specifically variable universal life (VUL) and equity indexed universal life (EIUL). Both are designed so that a portion of the premium you pay buys insurance coverage, while the rest goes into investments that build the “cash value” portion of the policy.

With a VUL, you invest in portfolios known as “subacccounts,” which are essentially the equivalent of mutual funds. Most VUL policies offer a dozen or more such subacccounts, everything from domestic and international stock funds to all sorts of bond funds.

An EIUL, on the other hand, allows you to invest a portion of your premium in an investment whose return is pegged to a benchmark such as the Standard & Poor’s 500 index. The idea is that you get the upside of stocks’ returns, but also downside protection in the form of a small guaranteed return.

So how do these policies amount to retirement plans? Well, the pitch in both cases is that you invest in the policy, your cash value builds without the drag of taxes over time and in retirement you begin withdrawing money as you need it for living expenses.

And there’s one more big lure: instead of just pulling the money from the policy, you borrow against your cash value at attractive rates. Since policy loan proceeds aren’t taxable, you have the prospect of tax-free retirement income.

All this sounds delightful, of course, but there are some major downsides to consider. First, a portion of your retirement savings is going to life insurance, and the cost of that coverage is often higher than what you would pay for a regular old term insurance policy.

Then there are a variety of marketing fees and sales commissions that cut into your return. In the case of VUL, there are the annual operating costs for the subaccounts as well as an annual fee known as the “M&E” or mortality and expense charge, all of which lower returns even more.

The investment fees are less explicit in EIUL policies, but they’re there nonetheless, built into the formulas that are used to calculate returns.

Speaking of those formulas, they’re typically so complicated and convoluted, it’s difficult for any average person to follow them, let alone understand whether or not you’re getting a good deal. (Equity-indexed annuities are similar to equity indexed universal life policies from an investment point of view.)

And both types of policies come with a big potential tax trap - namely, if you’ve borrowed from the policy and then let it lapse, the investment earnings you’ve withdrawn that were touted as tax-free become taxable. So if you’ve been using the policy for income in retirement, you could end up facing a substantial tax bill late in life when the last thing you need is to be shelling out beaucoup bucks to the IRS.

I think these policies are too expensive, too complicated and too much trouble to be worthwhile.

In my opinion, you’re better off maxing out your 401(k), investing in an IRA if you can, funding any other tax-advantaged accounts you may have access to (such as a SEP or solo 401(k) if you’ve got business, freelance or self-employment income), and then moving on to tax-efficient investments in taxable accounts, including low-cost index funds, ETFs and tax-managed funds.

If you’ve done all this and still have money to invest for retirement and are considering a VUL or EIUL, I recommend you first read “Variable Universal Life: Worth Buying Now?,” which was written by James Hunt, a former Vermont insurance commissioner now with the Consumer Federation of America.

If you’re still hot on getting one, I suggest you take the policy, the cash-value projections and all the information you can get about fees and costs and go to a financial planner who doesn’t depend on the sale of such policies for his or her livelihood for a second-opinion about using the policy for retirement income.

If after doing this, you’re confident that you understand the costs and the risks and you still want to buy such a policy, fine. But if your decision comes back to haunt you later on, don’t say you weren’t warned.

Got a question? Ask the expert.

This isn’t the first, or the last time we’ve faced economic uncertainly, but with 30 or 40 years until retirement, there’s no need to rush out of the market.

Question: I’m 28 and have my Roth IRA in a 2045 target-date retirement fund. In the last couple of months, I’ve lost almost an entire year and a half’s worth of profits. I want to keep contributing to my Roth, but I’m concerned about the possibility of recession and all that’s going on in the market. What do you think - should I try something else or just suck it up and keep investing in the same fund? –A.P., Crofton, Maryland

Answer: It’s perfectly natural for you to be anxious or even scared at times like this. Read the newspapers and you almost can’t help but come away with the impression that we’re in the midst of a total financial meltdown, an economic Armageddon, so to speak.

Combine this sense that the system is ready to come crashing down around us at any moment with the fact that the broad stock market is down about 15% from its peak last October and it’s no wonder you’ve begun second-guessing your decision to invest your Roth money in a target-retirement fund that, given your age, is probably about 90% or so invested in stocks.

But as much as I understand your urge to abandon your plan, I think it would be a mistake.

That said, I don’t think the solution is to just “suck it up.” That suggests a certain macho attitude that may have a place in certain sports, but isn’t really appropriate to investing. Ration and clear thinking are what’s needed to succeed as an investor.

Question: I’m 68, recently retired and have $250,000 to invest. I don’t know much about finances and I’m confused by all the information out there. I know I should diversify, but how do I determine where to put my money? –Grace, Yukon, Ohio

Answer: Well, you say you don’t know much about finances, but at least you know that you should diversify your $250,000 rather than plow it all into any one type of investment.

That’s a good start, especially given the precarious state of the financial markets today. People who went overboard on one asset class because it seemed like a sure thing just a couple years ago - real estate, financial stocks, whatever - are now paying the price, while people who take the same approach today with the hot investments du jour - gold and commodities come to mind - may end up paying the price tomorrow.

But as crucial as asset allocation is it’s still not as important as the factor you’re apparently overlooking: you.

That’s right, knowing all about building a well-balanced portfolio with different asset classes that work in concert with each other doesn’t mean anything if you haven’t first asked yourself what exactly you are trying to achieve by investing this money.

If this is an extra stash you probably won’t have to touch and will likely leave to your heirs, then you don’t have to worry so much about short-term losses and you may be able to invest more aggressively than is typical for someone your age.

If, on the other hand, you’re going to be drawing on this money for regular income to supplement Social Security, then you can’t afford to risk big setbacks because the combination of market losses and withdrawals can put a big dent in our portfolio’s value, raising the possibility that you could run through your two hundred and fifty grand too soon.

You’ve also got to take your emotional and psychological makeup into account. It’s one thing to say that you’re capable of riding out ups and downs in the market because you know that stocks usually generate the highest returns over the long run. But will you feel that way if the value of your holdings has dropped by 20% or 30%? Or at that point will you more likely be dumping everything you can and fleeing for the safety of CDs?

You can’t compensate too much on the side of safety, however, and just plow virtually all your money into CDs and money-market funds - unless you don’t mind the fact that the purchasing power of your money is likely to drop over the long-term after taxes and inflation.

I think that most people can sort through these issues and come up with a reasonable mix of assets that gives them enough upside potential to earn decent returns while maintaining sufficient downside protection against stomach-churning losses.

By answering a few simple questions about your risk tolerance, and how long you plan to have your money invested, for example, our Asset Allocator tool will suggest an appropriate mix of stocks and bonds. You can then go either to our Fund Screener or consult our Money 70 list of recommended mutual funds to find specific funds to fill that suggested mix.

If you’re going to be relying on your $250,000 for retirement income, I’d suggest you check out T. Rowe Price’s Retirement Income Calculator. You’ll get an estimate of how long your money is likely to last. You can then try different investment strategies and withdrawal rates to see whether your money lasts longer or goes sooner.

But, again, you’ve got to consider the “you” factor. If you feel overwhelmed when you start to deal with different investment alternatives or you’re just not confident about revving up calculators and the like, then you should probably get some professional help.

You’ve got several choices. You can hire a financial planner who can take a look at your overall situation, discuss your goals and come up with a plan. Typically, planners want an ongoing relationship, which means paying a certain percentage of your assets in fees each year (although some are willing to work on a flat-fee or hourly basis). Many large investment firms and mutual fund companies also give investment and planning advice these days.

Be careful, though. There are lots of people out there posing as advisers who are really peddling high-priced investment products or just looking to rip you off; $250,000 throws off more than enough scent to bring such opportunists and scam artists flocking to your door.

Whatever you do, don’t rush. Better to take some extra time and make a good decision that perhaps you could have made sooner than to move quickly and end up regretting that you did.

A diversified strategy and periodic readjustments will help you steer clear of market madness. Tune out all the noise and stick to the game plan.

Question: I generally review my portfolio twice a year to see if I need to make any adjustments. But given that the market has been down in recent months, I’m wondering whether I’m better off waiting until the market rebounds or sticking to my usual schedule. What do you think? –Todd M., Bryan, Ohio

Answer: I assume that when you talk about adjusting your portfolio twice a year, you mean that you’re rebalancing to bring your mix of stocks and bonds back to its original proportions.

And if that’s the case, then the strategy you’ve been following up to now makes perfect sense to me. As different investments earn different returns, your portfolio’s proportions will shift over time. So you periodically need to sell some shares of investments that have done relatively well and plow the proceeds into those that have trailed - or just funnel new money into laggards - to bring your portfolio back to its proper balance of risk vs. return.

Granted, one could argue about which of the many different rebalancing strategies available is the most effective. (I’m a member of the “once a year is enough” club myself, mostly because it’s easy and investors are more likely to stick with what’s simple.) But the most important thing is that you’re consistent - that is, you choose a method and then stick to it.

All of which is to say that I believe you ought to think twice - or maybe even three or four times - before you abandon your current strategy.

I can understand why you might have the urge to change your game plan. You’re no doubt hoping that by waiting a bit some of your battered investments will recover and you won’t have to realize losses.

But the whole point of building a mix of different types of assets based on your goals, time horizon and risk tolerance, and then rebalancing back to that blend on a regular basis is that you can’t predict the future. You don’t know when the market will fall or when it will recover. You don’t know the best time to get out of stocks and into bonds or vice versa. You don’t even know when it’s the ideal time to rebalance your portfolio, except in retrospect, of course.

So to deal with that lack of knowledge, you create a strategy, a disciplined system that can help guide you through the uncertainty.

I know that some people may see this as a head-in-the-sand approach especially given what’s been going on lately, what with major investment bank Bear Stearns getting snapped up at a fire-sale price, the Fed scrambling to keep the economy afloat and investors worldwide wondering what the next shock might be.

After all, in fast-moving and perilous times like these, don’t you have to be most nimble, most flexible, most willing to try something new?

Actually, no. It’s in times of crisis when you most need to stick to your plan. The far bigger danger in a volatile market like today’s is that you end up making a move that seems brilliant at the moment but turns out to be not so smart in the future.

Or, if you really get into the spirit of second-guessing your plan, maybe you end up making a series of such moves as you react differently to each crisis du jour.

That’s not to say you can’t ever deviate from your plan. If you find that you don’t have the stomach for risk you thought you had when you created your portfolio - it’s not unusual for investors to overestimate their appetite for volatility when the market is doing well - then maybe you need to scale back your stock holdings a bit. And if that’s the case, there’s no need to wait until you make your usual adjustment.

Similarly, if you’ve concluded after careful deliberation that some of your stocks or funds are clunkers that need to be replaced quickly, then replace them as soon as you find acceptable substitutes. You might even want to occasionally sell some holdings in taxable accounts to reap tax losses that can be used to offset other gains or even ordinary income.

But, remember, if you stray from your game plan too often and begin basing your rebalancing decisions on gut feelings about what the market may or may not do and when it might or might not do it, then you don’t really have a plan anymore. You’re just playing hunches.

Retirement is more than just numbers. You need to look at all the puzzle pieces before you can put them together, says Money Magazine’s Walter Updegrave.

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Question: I’m 55 years old and would like to retire at 60. I’ve got $30,000 in a money market account and $170,000 in my 401(k). I’ll have a pension of $1,500 a month and I’ll collect Social Security of about $1,800. Do I have enough to retire at 60? –Liz, Los Angeles, Calif.

Trying to figure out whether you can afford to retire - at 60 or any other age, for that matter - is essentially a process of putting together pieces of a financial jigsaw puzzle.

Some of the puzzle pieces are the income you’ll collect in retirement - your $1,500-a-month pension and your $1,800 monthly Social Security check. Others are the assets from which you can draw income - the $30,000 you have in a money-market account, the $170,000 in your 401(k) and whatever growth you’ll have in those accounts from additional savings plus investment earnings over the next five years.

The idea is to assemble the various pieces and then see whether a picture of retirement life emerges - that is, one that reflects a post-career standard of living that’s acceptable to you.

Problem is, it’s virtually impossible to develop even the fuzziest image of retirement life in your case because you have left out several major pieces of the puzzle.

You give no indication, for example, of the various expenses you will incur in retirement. Without having a decent handle on how much money will be going out on a regular basis, it’s virtually impossible to say whether the money coming in from your pension, Social Security and reasonable withdrawals from your savings will be sufficient to support you comfortably after you stop working.

A particular concern for someone in your position is health care. If you retire at 60, you will have to wait five years until you qualify for Medicare. If you’re fortunate enough to have retiree health coverage from your employer - which is less frequently the case for most workers - then maybe this is a minor piece of the puzzle that won’t materially affect your ability to retire soon.

But if you’re going to have to provide that coverage on your own, then you’ll need to factor the cost of private medical insurance into your budget for at least the early stages of retirement. As you can see by perusing the price of policies at this site, that expense alone could be enough to determine whether you can actually afford an early exit from the workforce.

And even some of the puzzle pieces that you have mentioned need to be refined more if you want more than just a vague sense of whether you’re prepared. Take your 401(k). It’s not just the size of your account that matters, but how it’s invested. Are you hunkered down mostly in cash and fixed-income securities? Are you taking a flier on high-octane stock mutual funds? Or do you have your money spread among a diversified lineup of both stock and bond funds? The answer can have a significant impact on how much income you can expect to draw from your retirement savings, and how long those savings might last.

All of which is to say, based on what you’ve told me, nobody can give you an accurate sense of how viable an option retiring at 60 is for you.

Fortunately, there are two ways you can quickly bring your retirement prospects into sharper focus.

One is to plug all your pertinent financial information - pensions, Social Security, retirement investment accounts, your anticipated retirement expenses - into a decent online calculator, such as Fidelity’s Retirement Income Planner, that can crunch all the numbers and assess your odds of being able to retire on the schedule you envision. (You don’t have to be a Fidelity customer to use this tool, although non-customers do have to register at the site.)

The other way to do this is to hire a financial adviser to do the analysis for you. If you take this route, however, be careful to avoid glorified sales people and outright scamsters posing as advisers.

Whichever way you decide to go, I recommend you run multiple scenarios to see how your retirement prospects decline or improve as you vary your assumptions. For example, it could very well be that delaying retirement just a year or two could fatten your nest egg enough to give you a much more comfortable lifestyle and reduce your odds of running out of money.

You might also want to try varying the date at which you’ll start receiving Social Security. You can begin collecting as early as age 62. But holding off can boost your payments by as much as 8% a year. Or you can figure out how your payment might vary at different ages, with an online calculator.

Of course, postponing Social Security will mean drawing more money from your savings while you’re waiting to collect. But this decision can work in your favor if you live to life expectancy or beyond.

You’ll also want to factor in other possible income sources, such as a reverse mortgage and working in retirement. You may not need to rely on these options, but it’s a good idea to see what sort of cushion they might provide.

Finally, if you are serious about retiring at 60, you should definitely begin considering you’ll actually live in retirement. I mean think about how you’ll fill the hours of your days once work isn’t dominating your schedule. Neglect this sort of “lifestyle planning” and your retirement may be a financial success but not emotionally fulfilling.

But it’s all got to begin with an assessment of all the pieces of the retirement-planning puzzle, not just a few. So either start evaluating the big picture on your own along the lines I’ve recommended, or find someone who can help you bring it into clearer focus.

Got a question? Ask the expert.

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Question: If I invest some of my money in bonds for retirement, what penalty would I pay if I had to sell some of those bonds? –Terri

Answer: Winston Churchill once famously described Russia as “a riddle wrapped in a mystery inside an enigma.” As far as many individual investors are concerned, he might have been talking about bonds too.

And indeed these days the bond market is even more confusing than usual, what with cross currents ranging from subprime mortgage problems to the threat of recession to the possibility of renewed inflation sweeping through the market.

So I’m happy to answer your question and at the same time try to provide some broader advice about steps you and other individual investors might take to navigate today’s challenging bond market.

Let’s start with a quick recap of what bonds are and how they work.

Basically, a bond is an IOU. When you buy a bond - whether it’s a Treasury, corporate or municipal bond - you’re essentially lending money to the issuer who agrees to make interest payments and repay the principal, or face amount of the bond at the end of its term.

When you invest in bonds (or bond funds, for that matter), you take two risks. One is called credit risk, which is the possibility that the bond issuer might not be able to make required interest payments or repay the principal value at the end of the bond’s term.

That’s not a problem with Treasury bonds, since Uncle Sam can always tax us to come up with the dough to make good on the bonds. But this is a risk with other types of bonds. Today, investors are particularly jittery about credit risk in part because some bonds are backed by pools of mortgages whose value has become suspect because of problems in the credit and housing markets.

The second risk bond investors face is called interest-rate risk. Think of a seesaw with interest rates on one side and bond prices on the other. When rates go up, bond prices go down.

This inverse relationship makes sense when you think about it. Let’s say I buy a 10-year bond for its face value of $1,000 that pays 5% annual interest, or $50 a year. And let’s assume that right after I buy the bond inflation fears push up interest rates so that a similar 10-year bond issued at a $1,000 face value the very next day has to pay 6% annual interest or $60 a year. Clearly, the value of my bond would fall below $1,000. After all, who would give me a thousand bucks for 10 payments of $50 a year plus the return of the $1,000 face value when for the same thousand dollars they could get 10 payments of $60 a year plus the return of the $1,000 face value?

Which brings us back to your question: if you wanted to sell your bonds what sort of penalty might you pay?

Well, you wouldn’t actually pay a penalty in the same sense that a bank charges a penalty for cashing in a CD early. Rather, the amount you would receive for your bond would depend on its market value.

If bond investors were concerned about the issuer’s ability to pay interest and principal - or they had questions about the value of assets backing the bond - then you might get less than you paid for it. How much less is hard to say. That would depend on how serious other bond investors viewed the problem.

But even if there were no credit concerns, you might get less than you paid for your bond if interest rates have climbed since you bought it. How much less depends on a number of factors, including the bond’s maturity date and its “coupon,” or the annual fixed rate of interest the bond.

In the case of interest-rate risk, it’s a little easier to estimate how much you might lose because there’s a nifty little stat called duration that gives you a good sense of how sensitive a bond is to changes in interest rates. If a bond has a duration of, say, 8 years, then its price would drop roughly 8% for every one-percentage point increase in interest rates.

The broker who sold you the bond should be able to give you its duration. You can also estimate the duration of a bond with this calculator. And by going to the InvestinginBonds site, you can also check the recent trading prices of government, municipal, corporate and mortgage-backed.

You’ve asked about a penalty, but you should also know that credit and interest-rate risk could work in your favor. If a bond issuer’s creditworthiness improves after you bought the bond, you might get a higher price than you paid. Similarly, if interest rates fall, the price side of the seesaw would rise, lifting the bond’s price. In fact, if the bond has a duration of 8 years and rates fell by one percentage point, then the bond’s price would rise by about 8%.

One thing you didn’t ask about but I think is important to bring up anyway is whether you should be in individual bonds, as opposed to bond funds.

My take on that is that if you really don’t know your way around bonds - and I’ve only scratched the surface here - you shouldn’t buy individual issues. There are too many ways to make costly mistakes in the bond market, like the very real possibility of dramatically overpaying for what you get.

And even if you do consider yourself an old bond hand, you’re still probably better off in funds unless you’ve got enough moola to build a diversified portfolio of individual issues. Reasonable people can disagree about how much you need, but I’d say you should have $50,000 or more to invest in individual bonds.

If you do go the fund route, I’d recommend sticking mostly to funds that invest in high-quality bonds and keep the average maturity in the short- to intermediate-term range, or four to seven years. I think that’s a smart strategy - especially given all the concerns today about credit quality and a possible uptick in inflation.

You can always try fancier strategies, of course. Just be aware that if things go wrong, you could end up having to take a loss on your bonds or bond funds if you sell.

Got a question? Ask the expert.

It’s easy to select a good asset allocation for your nest egg on your own, but if you don’t have the discipline to stay balanced, a target-date retirement fund could be your best option, says Money Magazine’s Walter Updegrave.

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Question: I’ve got my 401(k) invested in a target-date retirement fund. I’m wondering, though, whether I would be better off investing it in large-cap, mid-cap, small-cap and blended funds, putting 25% into each option. What do you think? –J. Duffaut

Answer: You’ve no doubt heard the expression, “First, do no harm.” (You scholarly types may be more familiar with the Latin version, “Primum non nocere.”)

It’s a bedrock principle that all good physicians adhere to. The idea is that a doctor shouldn’t dole out medicine or prescribe a treatment that has an uncertain benefit for the patient but may have a good chance of causing harm.

In other words, a doctor must consider the downside before intervening.

Well, I think that individual investors - and particularly people who are building a nest egg for retirement in a 401(k) or similar account - ought to take this principle to heart as well.

Take the case of 401(k)s and target-date retirement funds. The number of 401(k) plans offering target funds has mushroomed over the past few years and more and more participants are plowing their contributions into this option. I think the growing popularity of target funds is good for two reasons:

1. They make retirement investing easy. Just choose a target fund with a date that roughly matches the year you plan to retire, and you get a ready-made diversified portfolio of stocks and bonds that’s appropriate for someone your age. What’s more, the fund automatically shifts its mix more toward bonds as you age, so that you take less investing risk as you grow older.

2. They can save us from our own worst impulses. Here I’m talking about our tendency to chase hot funds and sectors, buy into inflated asset classes and pour too much money into company stock and other investments that may be risky but we don’t necessarily see as risky. In short, target funds make it harder for us to sabotage our own retirement planning efforts.

Are target funds perfect? Of course not. But if your 401(k) offers this option, then it seems to me that before you reject it in favor of other funds, you ought to ask yourself: Can I do better on my own?

The answer may very well be yes. You don’t have to be an investing savant to put together a decent portfolio of stock and bond funds. But you do have to take responsibility for creating and maintaining a workable investment strategy - that is, deciding on a reasonable mix of stocks and bonds, choosing appropriate funds, monitoring their performance and then rebalancing your portfolio once a year.

If you don’t know enough about investing to do this or you’re not willing to put in the fairly minimal time and effort needed to do it (or you know deep inside that you’ll probably give in to the urge to tinker often enough that you may undermine your efforts), then it seems to me that taking an active approach has the potential to do more harm than good. In which case, I’d say you’re better off with a target fund.

Now, I don’t know you well enough to judge how capable or responsible an investor you are. But based on your question, my guess is that you’re probably a good candidate for a target fund.

Why? Well, you talk about putting equal amounts of money in large-, mid- and small-cap funds. That means you’ve got twice as much money in mid-size and small stocks combined as you do in the big boys. (Let’s leave the “blended” funds aside since I’m not sure what kind of funds you mean.)

But if you take a look at the percentage of total market value that large-, mid- and small-cap stocks actually account for in the stock market, you find that large stocks represent almost 75% of market value and mid- and small-caps combine for the other 25%. (You can see this for yourself by plugging the stock market ticker for Vanguard’s Total Stock Market Index fund—VTSMX—into the Instant X-Ray tool.)

This means that investors as a whole have allocated about three times as much of their capital to large stocks than medium and small ones. You, on the other hand, are proposing to do pretty much the opposite by putting twice as much in the mid-size and small stocks.

If you’re doing this because you believe you have insights that investors overall lack - in effect, you think they’ve made the wrong decision - then fine, maybe it makes sense to go so far against the grain. But if you don’t have insights or information the rest of the investing world doesn’t have, then I don’t see how you can justify divvying up your money as you’ve suggested.

Either way, I can tell you that by piling so much into mid- and small-size stocks (and putting nothing in bonds, unless they’re in your “blended” category), you are creating a very volatile portfolio that, if nothing else, is virtually guaranteed to give you a white-knuckle ride.

So I guess I would answer your question with one of my own - namely, how did you come up with that 25%-in-each-group strategy? And unless you have a very cogent reason for it, I’d say you’re better off sticking with your target-date fund.

That’s not to say, however, that at some point in the future you can’t switch out of your target-date fund and into a portfolio of individual funds you’ve created. But for that to make sense, I think at the very least you would want to have read a few of our Money 101 lessons, starting with the basics of investing, then moving on to stocks, bonds, mutual funds, asset allocation and, of course, retirement planning.

Until you do that, however, I say your first obligation is to do no harm, which means staying put in that target-date fund.

If your company offers both a Roth 401(k) and a regular 401(k), investing in both may be your best option, says Money Magazine’s Walter Updegrave. But how much should you put into each?

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Question: I’m a young professional in my first job who anticipates being in the 28% tax bracket for at least the next five years, although I may move to a lower bracket after that. My company offers both a traditional 401(k) and a Roth 401(k). What proportion of my contribution should I put in the regular 401(k) and how much should go into the Roth? —Mike Davis

Answer: As more companies with 401(k)s begin offering a Roth option, more people are going to face the quandary you do now: Where should those 401(k) contributions go? Into the good old regular 401(k) where you contribute pre-tax dollars and then pay tax on your contributions and investment earnings at withdrawal? Or into the Roth 401(k) where you invest after-tax bucks but enjoy tax-free withdrawals in retirement?

I wish there were a simple formula I could give you to make this decision. Alas, there isn’t. What I can do, though, is describe how each of the options works and explain the pros and cons of the two so that you can decide how to divvy up your contributions.

Regular 401(k)s vs. Roth 401(k)s

Mathematically there’s no difference between the two. Let’s say you’re in the 25% tax bracket and you have $15,500 in pre-tax pay that you can contribute to your 401(k). Whether you put that $15,500 of pre-tax dollars into a regular 401(k) or pay $3,875 in taxes (25% x $15,500) and put the remaining $11,625 after tax into a Roth, you end up with the same amount of after-tax dollars in retirement. Click here to see how much you would have.

But as readers of this column already know, this little example assumes that your tax rate is the same when you pull out the money as when you put it in. If you are in a lower tax bracket when you withdraw the money, then you would net more money in the regular 401(k) because you would have avoided tax at a higher rate and paid it at a lower rate.

And if you’re in a higher tax bracket in retirement, then the Roth would be the better deal because you would have paid taxes upfront at the lower rate.

But there’s another factor to consider—namely, Congress, in its wisdom, decided to make the maximum dollar contribution limits the same for regular 401(k)s and Roth 401(k)s. For 2008 that limit is $15,500 (plus another $5,000 if you’re 50 or older) regardless of whether you’re contributing to either one or both.

This means you can put away more money on a tax-advantaged basis in a given year by doing the Roth 401(k), assuming you’re willing to contribute the max.

For example, let’s say you decide to contribute $15,500 after taxes to your Roth 401(k). To contribute the equivalent amount in pre-tax dollars to a regular 401(k), you would have to sock away $20,667. Why that amount? Because for someone in the 25% tax bracket, $20,667 before taxes is the same as $15,500 after taxes. (Subtract 25%, or $5,167, for taxes from $20,667 and you get $15,500.)

The rub is that you can’t contribute $20,667 in pre-tax dollars to the regular 401(k) because you would exceed the $15,500 limit. Thus, the Roth allows you put away more money each year.

Hedging your bets

So, back to your question, how much should you contribute to the regular 401(k) and how much to the Roth?

The issue that you raised in your question about moving up or down the tax-bracket ladder during your career isn’t really important in making this decision. What matters is the tax bracket you’re in when you invest the money in and the bracket you’re in when you pull it out.

But can you really be sure what tax bracket you’ll be in down the road? If the answer were yes, then deciding which type of 401(k) to fund would be a simple matter of going to a calculator like this one and plugging in a few numbers.

But I don’t think the answer is so clear cut for most of us. Your future tax bracket depends on a lot of factors, including your career trajectory, the amount of money you save for retirement and, perhaps the biggest wildcard of all, what tax laws Congress passes in the future.

So I see this as a case where you want to hedge your bets and put some money in a regular 401(k) and some in the Roth. As for arriving at percentages, that’s more art than science. But a reasonable way to go about it would be to pick a split as a starting point and then refine it according to your circumstances.

Divvying up your contribution on a 50-50 basis might seem like a logical place to start. But remember: You’re dealing in pre-tax dollars with the regular 401(k) and after-tax with the Roth. So if you were to contribute the $15,500 max and put 50% in each option—$7,750 in the regular 401(k) and $7,750 in the Roth—you would actually be favoring the Roth option because $7,750 after-taxes is the equivalent of $10,333 before taxes if you’re in the 25% tax bracket.

So you might want to use, say, a 60-40 split with 60% going to the regular 401(k) as a starting guideline. If you think you’re more likely to end up in a lower tax bracket in retirement, then maybe you tilt to 65% or 70% in favor of the regular 401(k).

If you feel you’ll probably move into a higher tax bracket, then you tilt the mix the other way toward the Roth, shifting it more depending on how likely you see the possibility of ending up in a higher bracket.

Peace of mind

Of course, there are other factors that might affect the split you settle on. If you’ve already got lots of dough sitting in a regular 401(k) or IRA account, then maybe you’ll lean more toward the Roth 401(k). Or if the idea of having a tax-free stash of money to draw on in retirement gives you peace of mind, you might also favor the Roth.

I wouldn’t get too obsessed about coming up with an “ideal” split each year. For one thing, over the course of a career, you’ll likely have opportunities to re-jigger the proportion of savings you have in each account by funding one type more than the other in subsequent years.

Besides, it’s virtually impossible to know in advance what the best combination of regular and Roth contributions will turn out to be. Even if you could predict exactly how much you’ll earn and save the rest of your career, you can’t predict what sort of tax regime will be in place when you finally retire.

So I suggest you go through the process I described above, make the best judgment you can and then periodically re-evaluate where you stand. As long as you have at least some money in both types of accounts, the extra flexibility you’ll gain for managing withdrawals in retirement will almost certainly make you better off than if you had plowed all your money into just one option.