How to Set Up a Retirement Fund

Studies show that most people need an income of about 80 percent of their income during their working years to maintain the same standard of living to which they have become accustomed. According to a study by Aon Associates, assuming a 4 percent rate of return on savings, you will need as much as $21,635 to generate $100 per month in income in retirement. It is important to save aggressively for retirement, using every tax advantage you can.

Contact a financial advisor. An advisor can help you select a combination of mutual funds, stocks, bonds and annuities that meets your individual goals and circumstances. If you are a beginner investor, look for an advisor who holds a Series 6 license or who works for a Registered Investment Advisor, or one who holds a certified financial planner or chartered financial consultant designation. Select an advisor who listens to your concerns and objectives and who learns the facts of your situation before making recommendations.

Select a product mix. For most new investors, this means mutual funds and annuities, which help shield you from the risk that any given company or bond issuer may collapse, taking its stock or bond prices with it. Mutual funds and annuities provide instant diversification -- you effectively invest in many different companies with one contribution.

Select a savings vehicle. This could be an IRA or Roth IRA, a SIMPLE IRA, 401(k) or 403(b) account at work, or for self-employed individuals or those who own their own businesses, it could be a Simplified Employee Pension (SEP) plan. Each has unique advantages and disadvantages, depending on your income or situation.

Contribute. In most cases, you can either write a check to the investment company or arrange for an electronic bank draft from your account. If you used a financial advisor, you can generally expect to pay a commission on the transaction of about 6 percent of the amount contributed, unless you bought an annuity. In this case, the insurance company pays the commission, but recoups its costs if you withdraw money during the surrender charge period -- typically between five and nine years.

Diversify. Invest in a variety of different kinds of funds. Spread your assets between different kinds of retirement accounts as well. Some accounts, such as 401(k) accounts, SEPs, traditional IRAs and 403(b) accounts are tax-deferred, but withdrawals in retirement are taxed as income. Other vehicles, such as Roth IRAs and permanent life insurance are tax free in retirement, but don't give you a current year tax deduction. Diversify between taxable and tax free income sources in retirement, as well as between stocks, bonds, annuities and other asset classes.