We had a financial setback a few years ago and have just now climbed out of debt. I must retire in four years and we need to buy a house. We want to make a $100,000 down payment to keep our mortgage payments down. I have a job that could allow me to save $20,000 a year. How would you suggest I invest these savings to allow growth at a reasonable level of risk?

Paul's Answer:

If I understand correctly, you want to save up money now to retire and put $100,000 down on a house in four years. You can save $20,000 a year. From a purely mathematical point of view, this can be figured out on a financial calculator.

If you start from scratch and add $10,000 to your savings every six months, you could reach your $100,000 objective in four years if you achieved a 12.6 percent return. That is certainly within the realm of possibility, but it's far from guaranteed.

Because you can't guarantee that you can get from where you are to where you want to be by the time you want to be there, something has to be flexible - either the time or the amount of the goal. Even even if you don't have any flexibility in when you retire, it sounds as if you have some flexibility about the amount of your down payment. It could be more or less than $100,000, depending on how your investments perform.

This means you should not feel under pressure to produce above-average returns, which normally come bundled with above-average risks.

Therefore I think your main challenge will be allocating your assets in a way that balances your need for return with your relatively short time frame. There's no perfect way to do this because it is a balancing act, and nobody can know what the returns of the market will be over the next four years. For instance, one year ago very few people would have predicted the slowdown we have seen this year.

You should have a balance of stock funds and bond funds, and I suggest you start somewhat aggressively and gradually make your portfolio more moderate.

Invest 70 percent of your first year's savings in equity funds and the rest in bond funds. With your second year's savings, invest half in stock funds and half in bond funds. Invest your third year's savings 30 percent in stock funds and 70 percent in bond funds. And put your fourth year's savings in a money-market fund. When you are six months away from the time you need to buy that house, put 90 percent of your savings into a mixture of bond funds and a money-market fund, leaving the remaining 10 percent in stock funds.

For the bond part of your portfolio, divide your money as follows: 70 percent in the Vanguard Total Bond Market Fund and 30 percent in the Vanguard Short-Term Corporate Bond Fund.

Allocate your equity investments this way: Vanguard Total International Stock Market 40 percent; Vanguard Morgan Growth 20 percent; Vanguard Value Index 20 percent; Vanguard Small-Cap Index 20 percent.

Because most Vanguard funds require $3,000 to open an account, you will not have enough money until your second year to get into all these funds with the percentages just right. But if you invest $20,000, you can buy a stake in each of these funds, then achieve the suggested balance in your second year when you add more savings.

In the first year, invest $5,000 in Total International Stock Market and $3,000 in every other fund. That will get you off to an excellent start.