If your work matches any contribution then at least give enough to get the maximum match. If you do not at least meet the match then you are throwing away free money. If possible then each time you get a raise increase the amount you are sending to your retirement account by 1-2%. Your check will still go up and you will be saving more for your retirement!
STEP TWO – Figure out your stock/bond ratio
This first allocation is really just your risk attitude and the length of time you have until you retire. Most financial advisors recommend a non-risk taker to use the formula (90-AGE) and (120 – AGE) for a risk taker to get their stock percentage. If thinking about your stocks gives you a stomach ache then go with a less risky portfolio. Before the market crash they found that most people thought they were riskier than they really were. Another way you can know for sure if you have a risky or less-risky financial outlook is to take a look at what you did during the crash. Did you buy more stocks? You are risky. Did you sell? Stick with non-risky. Did you hang on – then you are probably somewhere in the middle.
STEP THREE – Figure out your international stock vs US stock ratio
If the US market goes down you want to be diversified into other markets. Most of the analysts recommend 10-60% international. International stocks are riskier and have the potential to bring in higher gains.
STEP FOUR – Figure out your small/mid cap stocks vs. your large cap stock ratio
Small and mid cap stocks carry more risk and higher gains. Most analysts recommend 10-40% small/mid cap stocks. Some of the charts I saw actually suggested that 10-20% of small cap stocks reduces your risk. Choose your amount based on your own risk level.
STEP FIVE – Figure out your value vs your growth stock ratio
Value stocks generally have a high dividend yield. Growth stocks are ones that have not reached their full potential yet. Most of the analysts seem to recommend 10-40% value stocks.
Start with your stock bond ratio (let’s say 90% stocks and 10% bonds)
Multiply your international stock ratio by your total stock ratio (90*0.40) = 36%
The rest is your US stock ratio (54%)
The overall diversification in this example would be 54% US stocks, 36% international stocks, and 10% bonds.
If you do the same multiplication with your small/mid cap and value % then you will get an overall number for those as well. There are small cap and value stocks in both the international and domestic so you can mix and match.
STEP SEVEN – Review your options
Everyone’s retirement account has different options (if you are in a 401K). If you are in an IRA then you will have more to choose from. Make sure to look at the expense ratios since that is the cost they will take if the stocks are up or down. Find a bond fund, US fund, and International funds to match your allocation. DRIP investing can be nice because it averages your stock purchases out over time (therefore reducing risk). Many companies offer cheaper investing if you register with their DRIP programs.
Re-balance your account once per year.