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10 or more years to go until retirement
To reach your goals, three words: Save, diversify, clarify.
March 30, 2005: 4:48 PM EST
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) If you're like a lot of people, your girth is growing faster than your retirement savings.

Well, here's some good news: If you've got 10 or more years until you retire, you've got time to bolster your nest egg significantly.

The biggest key to success will be saving as much as you can. Having the world's best-performing investments won't amount to a hill of beans, if you don't put away enough money to compound over time.

The second biggest key to success is getting the right mix of investments for your portfolio. Allocation is responsible for more than 90 percent of the returns you'll get, said certified financial planner Doug Flynn. "Allocation is paramount to everything."

The third key to success? Knowing your desires.

But let's start with first things first.

Save like you mean it.

Your 401(k) should be the first stop for your savings. Contributions are pretax, meaning you'll reduce your taxable income now and your savings will grow tax-deferred until retirement, when you'll pay income tax on your withdrawals.

Ideally, you should max out your contributions. The federal limit on employee contributions this year is $13,000 ($16,000, if you're 50 or older). Next year, it increases to $14,000 ($18,000 for those 50 and up).

But if your income qualifies you to invest in a Roth IRA, which is funded with after-tax money but grows tax-free, then Flynn suggests contributing enough money to your 401(k) to get the full match from your employer, and then fully fund your Roth. The limit goes up to $4,000 next year ($4,500, if you're 50 or older).

So, for example, if your employer matches 50 cents on the dollar for all your contributions up to 6 percent of your pay, contribute 6 percent of your pay. Then put $3,000 of after-tax money in your Roth. Any savings beyond that can be funneled into the 401(k).

If you make too much to qualify for a Roth, max out your 401(k) or other tax-deferred plans and then funnel savings to a taxable investment account (taking advantage of the low-dividend and capital-gains tax rates) and a nondeductible IRA, which is funded with after-tax money but which lets your money grow tax-deferred.

Set up the right mix of investments

With a decade or more until retirement, you want to have as much of your money in equities as you can handle comfortably, Flynn said.

If you have a moderate tolerance for risk, he recommends a 401(k) portfolio with 70 percent stocks and 30 percent bonds. If you're more conservative, you might opt for a 60-40 mix. If you're more aggressive and have 20 or more years, you might want as much as 80 percent in stocks.

For the equity portion of the 70-30 portfolio, Flynn recommends putting close to 40 percent in large-cap stocks, evenly split among a value fund, a growth fund, and a blend fund.

Beyond that, he suggests investing close to 11 percent of your money in each of the following areas: a mid-cap blend fund, a small-cap blend fund and a large-cap international fund that invests in non-U.S. stocks.

For the fixed income portion of your portfolio, he recommends putting 6 percent of your money in each of the following five areas: a total return bond fund, an inflation-protected bond fund, a short-term government bond fund, a floating-rate bond fund and a strategic income fund.

If your 401(k) doesn't offer a floating-rate bond fund, he recommends splitting the money you would have put into one evenly across the other bond components.

Or, if you're a more conservative investor, you might simply opt to put 15 percent of your money in a total-return bond fund and another 15 percent in a stable-value fund, he said.

Find the bull's eye.

This may sound ridiculous, but you're more likely to meet your goal, if you actually know what your goal is.

"People are committed when they know what they're committed to," Flynn said.

In other words, knowing you want a bigger nest egg is fine, but knowing roughly how much annual income you'll want in retirement is better.

Then you can figure out what you need to do from here to accomplish that. (For help, try this.)

And doing what it takes may actually feel less burdensome, since you have a game plan with a built-in reward at the end.  Top of page