Growing poor safely can be hazardous to your wealth.

Here's the information you need to get your dollars to work as hard as you do - so you can live "the good life" when you retire.

"Because that's what I've always done. I don't want to make any changes. I've always done well investing this way."

Ask 46-year-old Margaret, a successful association executive, about her investing rationale, and that's what she'll say. Yet her entire pension portfolio is invested in money market accounts and Treasury bills. This includes every single penny of $233,000! To every suggestion about diversifying and inflation-proofing her portfolio, Margaret shakes her head. She is absolutely adamant about keeping her money entirely in money markets and T-bills, much to her financial detriment.

Margaret believes that she is handling her money wisely. There are no razzle-dazzle investments with lots of bells and whistles to understand, no tax repercussions to consider. Basically, she doesn't have to do anything. So every night Margaret goes to bed feeling safe and secure because her future is tucked away in ultrasafe investments that have little to no risk.

Margaret is far from atypical, especially in the world of association executives. Plenty of professionals like Margaret have always invested "safely" in Treasuries, money markets, and certificates of deposit (CDs) - mainly because they have no idea where else to invest their money. Bonds are too confusing, and stocks seem much too risky. So they leave their money in low-interest accounts or keep buying T-bills over and over again.

Dwindling purchasing power 

What does this mean in real-dollar terms?

With inflation currently running at just under 3 percent, it means that your money is worth 3 percent less this year than it was last year. And it will be worth even less next year.

Applying this to Margaret, unless she changes her in vestment strategy by the time she is in her mid-seventies she'll have a nice dollar amount with lots of zeros. But how much is it actually going to be worth? How much will it really buy? Will she be able to retire in style, take a Caribbean cruise every year, and enjoy the other luxuries that she's been waiting to enjoy all of her hardworking life? Don't bet on it.

Unfortunately, even at age 46, the financial realities of retirement haven't set in for Margaret. She still earns a handsome paycheck and feels secure in knowing that more than $200,000 is already in the bank. But it is a false sense of security.

Margaret hasn't stopped to think about the taxes she'll be paying when she withdraws the money from her pension plan. And once she factors in inflation, her "safe" investments will dwindle to much less than what she imagined having during her retirement years. She'll slowly lose purchasing power.

Loss of purchasing power can be devastating because it happens gradually over a long period of time and may go unnoticed from year to year. The only thing you become aware of is that things seem to get a little bit tighter each year. But you still try to squeeze by. By the time you realize that you need to make major financial adjustments, it's almost too late.

Playing it safe doesn't always equal playing it smart. Keeping all your money in Treasuries and money markets like Margaret does is a great way to grow poor safely.

Unfortunately, many people are drawn to these types of investments because they are accessible, familiar, and easy to understand. Although they may help you feel confident about your investment ability, they don't make good sense 100 percent of the time for 100 percent of your dollars. Safe investments must be balanced with good growth investments, because over time, taxes and inflation can devastate your portfolio.

Don't assume that when you retire, your tax bracket will automatically drop either. Income from your investments may keep you in your preretirement tax bracket. And, again, you have to consider inflation. Even at a modest 4 percent inflation rate, your money will lose almost half its value over an 18-year period. After 5 years at 4 percent inflation, $100,000 will be worth $82,000; after 10 years it will be worth $68,000; after 15 years, $56,000. At the end of 20 years your $100,000 will be worth a paltry $46,000. Shocking, isn't it?

If you don't think you have a good chance of seeing all of those 20 years, you're wrong. Currently, even if you are 65 years old, your life expectancy is approximately another 21 years. That's a long time to plan for. And a long time to have inflation eating away at your portfolio.

What's the solution? Making sure that your nest egg is steadily growing, not steadily shrinking.

Consider stocks

Historically, when measured dollar for dollar, stocks have outperformed all other investments. From 1945 through 1991, stocks, as represented by the Standard & Poor's 500, returned an average of 11.8 percent. Small-company stocks did even better, returning 13.3 percent. Bonds, on the other hand, fared a lot less well. U.S. government bonds posted an average annual return of 4.8 percent; corporate bonds returned 5.4 percent.

According to a study done by Ibbotson Associates, Inc., a Chicago-based research firm, from 1926 through 1989, a hypothetical investment of $1 performed as follows:

* $1 invested in the stock market grew to $534;

* $1 invested in government bonds grew to $17.30; and

* $1 invested in T-bills grew to less than $10.

Given the reality of inflation combined with this strong case for stock ownership, does this mean that you should fill your portfolio with nothing but stocks? Absolutely not. But it certainly doesn't make sense to leave them out altogether. To structure a well-diversified portfolio properly, do consider investing in some high-quality bonds, but be sure to include some growth stocks as well.

Examine mutual funds

If you're like many association executives, you may choose to look to mutual funds rather than to individual stocks and bonds to implement your retirement plan strategy. That's fine as long as you understand what a mutual fund is and what it isn't.

Simply stated, a mutual fund is a professionally managed portfolio where many investors' dollars are pooled together. The investment dollars can be pooled together in an income fund, which consists of bonds; in a growth fund, which consists of stocks; or in a balanced fund, which is a mix of stocks and bonds. You can even go abroad with an international or global fund.

The pooling of dollars allows for a wide range of diversification, which can be especially important if you are investing a relatively small amount of money. But here's the tradeoff: You don't get to make your own investment decisions on a day-to-day basis. A professional fund manager does all the buying and selling and is the hands-on decision maker. Your only job is to decide in which mutual fund or funds to invest your retirement dollars. That's not as easy as it sounds: At last count there were about 10 gazillion funds from which to choose!

Here's some help in making your choices, beginning with an explanation of the different types of funds that are available.

Money market mutual funds. These are funds that buy and sell short-term financial instruments. Normally they keep a stable dollar price of $1 per share. The interest rate changes every day because the investments are so short term. Many investors use money market funds as the cash part of their portfolio, as distinct from the stock and bond components. This is entirely appropriate for a percentage of your retirement assets, but it should be a relatively small percentage - not the lion's share of your pension dollars, to be sure.

Stock mutual funds. Buying shares in a stock mutual fund means that you are investing in a portfolio of stocks. Stock mutual funds come in all shapes and sizes from blue-chip funds to small company funds to sector funds that invest only in one industry (like health care). Stock funds can range from low risk to high risk, depending on the types of stocks they hold.

Bond mutual funds. Bond mutual funds can be "plain vanilla" government bond funds holding only Treasuries, or they can be funds holding both Treasuries and securities of U.S. government agencies including Fannie Mae, Freddie Mac, and their kin. There are also corporate bond funds, tax-free municipal bond funds, and so forth. Don't only compare yields when you go shopping for a bond fund. Compare fund quality and maturity, too. Short-term, higher-rated bond funds pay less but offer more safety and considerably less volatility.

Balanced funds. These funds contain both stocks and bonds, looking for both growth and income. It's a way of almost splitting the difference between a stock fund and a bond fund and can be a good middle ground for beginning investors or for those whose dollars won't stretch quite far enough to divide between two or more funds. In the latter case, choosing a balanced fund may be your only means of investment diversification.

Global and International funds. International funds can invest anywhere outside the United States; global funds are free to invest in both U.S. and foreign securities. These are good ways to own foreign stocks and bonds and to let a fund manager who is an expert in the overseas markets manage these investments for you.

Before you decide . . .

Whether you are selecting from a small group of funds offered through your company-sponsored 401 (k) plan or from the entire universe of mutual funds, available for most self-directed retirement plans, here are some tips for picking and choosing, as well as questions you should ask before you decide.

* Find out how long the fund has been around. You don't want to invest in a brand-new fund, because you don't have any way to track its performance. If it did very well last year, so what? You need to know what it did 5 and even 10 years ago.

* Find out who the fund manager is and how long he or she has been around. This is important because this is the person who will be calling the shots. A well-known mutual fund was headed by a top manager for years. He left, and a new manager took over and then two years later was replaced by yet another manager. When the five-year track record of this fund was examined, it was important to remember that the new manager coming in had nothing to do with the previous track record. You couldn't judge his potential by this fund's past performance. That is why it is vital that you know who the fund manager is and how long he or she has been managing the fund.

* Find out how frequently the fund you're interested in "turns over" its portfolio. Is it a buy-and-hold approach or more of an active trading approach?

* If you're looking at a stock mutual fund, find out what type of stock the fund invests in. If it's a blue-chip mutual fund, you know that it invests primarily in large, household-name companies. A "small cap" fund, on the other hand, is more likely to invest in lesser-known aggressive growth stocks.

* Whether it's a blue-chip mutual fund or any other type of stock fund, make sure you ask what the top 10 stock holdings are. Six months from now this can change because of the trading that is likely to occur within the portfolio, but at least you'll get a good idea of the type of stocks that are considered for the fund. You'll also get a sense of the approach taken to stock selection.

* If you are considering a bond mutual fund, ask these questions: What is the credit quality or the average rating of the bonds in the portfolio? And what is the average maturity of the portfolio? Let's assume the average maturity of Bond Mutual Fund A is 30 years. This means that it will be a lot more volatile than a portfolio holding three-year bonds. Yields are usually higher with longer maturities, but so is risk.

* Find out the yield on the fund, but also check the total return. Total return means that even though you are getting a wonderfully high yield, you may be losing part of your principal at the same time. If you paid $10 a share for a bond mutual fund and it is now $9 a share, you've lost 10 percent of your principal. If you're getting a 10 percent yield, you're just breaking even.

* Finally, find out what the fund's yield and total return have been over the past year and over the past 5 and 10 years. This will reflect what it historically has been yielding, as well as what has happened to the principal. If you're told that the yield on a bond fund was 9 percent last year and the total return was 7 percent, then 2 percent of the principal was lost. The total return can be higher or lower than the yield.

Final words of advice

Keep in mind that total return is a much better indicator of the overall performance of the fund than yield figures alone. It not only tells you what your principal earned, it also shows whether actual dollars increased or decreased.

Another important caveat: If you choose mutual funds as your primary investment vehicles, don't invest all your money in one fund. Always diversify. Remember, a mutual fund's performance is only as good as the performance of the fund's manager, so always use the two-heads-are-better-than-one approach. Some people sink as much as $500,000 into one mutual fund - a real mistake. These investors have put an awful lot of eggs in one basket.

Whether you're partial to mutual funds or are more of a do-it-yourself investor, remember that when you're investing for retirement, you have to think long term. Don't make the mistake of trading in and out of investments hoping to latch onto the new "hot" mutual fund or the "it's-going-to-the-moon" stock du jour. Put your money into good, common-sense investments and then stay tuned. Of course, you should carefully evaluate your retirement portfolio at least annually to make sure that the investments that made sense last year still make sense today. Bear in mind, though, that one bad year does not a bad investment make. While "buy and hold" doesn't necessarily mean 'til death do you part, it also doesn't mean you should bail out right after the honeymoon - or before it even gets started.

RELATED ARTICLE: HIGHLIGHTS

* Playing it safe doesn't always equal playing it smart.

* Safe investments must be balanced with good growth investments, because over time, taxes and inflation can devastate your portfolio.

* Whether you're partial to mutual funds or are more of a do-it-yourself investor, remember that when you're investing for retirement, you have to think long term.

RELATED ARTICLE: Wondering About Funds?

Would you like to know where to turn to get plentiful information on mutual funds and their performance? Here are two handy sources:

* To obtain a complete directory of funds and their addresses, phone numbers, and investment objectives, send $5 to The Investment Company Institute, P.O. Box 66140, Washington, DC 20035.

* To find out how well any of more than 2,400 mutual funds is doing, contact Morningstar Mutual Funds at 53 West Jackson Blvd., Chicago, IL 60604; telephone: [phone]. Morningstar, the bible of mutual funds, ranks them according to performance and safety. It is to mutual funds what Value Line is to stocks.

Esther M. Berger, first vice president, PaineWebber, Beverly Hills, California, is a certified financial planner and author of Money Smart: Secrets Women Need to Know About Money.