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4 steps for allocating your retirement savings

October 27, 2010

by Dan Yu | MoneyRates Guest Contributor


This article is part of a MoneyRates.com series, 10 steps to a comfortable retirement.

Investing money for your retirement is the beginning of a lifelong process. How much should you invest? What savings vehicle should you use? What types of investments should you make?

Watch your savings grow with compound interest

When considering saving for retirement, one of the key things to remember is to start early. Even if starting early only permits the initial monthly savings to be modest, over time the savings can compound to a significant amount.

Take, for example, saving $300 per month for 10 years, assuming an earnings rate of 7.5 percent. The accumulated balance would be more than $53,300. Assuming no further contributions and average earnings of 7 percent for the next 25 years, the original $53,300 would grow to more than $289,000. If contributions of $300 per month continued for the entire 35 years and assuming a lower earnings rate of 6.5 percent, the accumulated balance would be more than $480,000.

401(k) with company match

One of the best ways to accumulate retirement assets is using a company-sponsored 401(k) plan. Retirement plans that provide company match contributions are ideal. Typically, a company may match 50 cent for every dollar up to the first 8 percent contributed by an employee. So an employee earning $60,000 a year who contributes 8 percent, or $4,800, would receive a company match of $2,400.

Determining asset allocation: basic principles

Depending on the plan participant's age, risk tolerance and long-term investment goals, creating an appropriate asset allocation would be the next step. This may require some assistance from a financial planner or investment advisor, but here are some basic things to consider:

First, ensure that the resources you set aside for retirement do not cause a cash-flow strain where you are carrying credit card balances and high-interest loans.

Second, be consistent with your savings plan and the amount you invest each paycheck, and over time try to increase the amount you set aside.

Third, depending on your age, risk tolerance and long-term strategy, try to determine what percentage of your asset will be invested in equities, fixed income or bonds and stable value or cash.

As a general rule of thumb, those 30 or younger should have about 60 percent to 70 percent invested in equity funds. Participants in their 40s should have between 50 percent and 60 percent, and as you near retirement age, you should slowly reduce your equity exposure.

Fourth, review specific investment fund options. Look at a fund's historical performance and category ranking, investment style and expense ratio.

As you begin to select your investment funds, remember to periodically -- at least annually -- review your overall asset allocation and the relative performance of each of the funds you selected. Adjustments to the portfolio may be required once a year, but do not buy in and out of funds frequently, because your long-term investment performance will suffer.

It might be difficult to get started, but once you begin the process of direct deposits into your retirement plan, you will soon realize the long-term benefit and financial security it will provide. So take action now, do not delay and begin to save for your retirement today.

Read more financial advice from our series, 10 steps to a comfortable retirement.

About the Author:

Dan Yu is a director at EisnerAmper. Mr. Yu provides comprehensive services to high-net-worth individuals, and has served executives and employees at AT&T, Novartis, Avaya, BNP Paribas, and Tiffany & Co. His consulting services include investment asset allocation design, financial analysis and tax compliance. He is a frequent speaker and has presented seminars to clients on various financial matters.

Prior to joining Eisner, Mr. Yu was a Senior Manager at KPMG LLP and PricewaterhouseCoopers LLP in the firms' New York City business units. He was formerly a financial analyst at Chase Manhattan Bank in the Global Investor Services Practice and the Latin America Private Banking Practice. Mr. Yu is a Certified Financial Planner (CFP®), Certified Investment Management Analyst (CIMA) and Certified Investment Management Consultant (CIMC) Designee, and a Registered Investment Advisor.

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