When you’re thinking about what should go into your retirement portfolio, ideally, it’s all too easy to get the order wrong, and focus on the investments first.
Which mutual funds should I pick?
Which bond funds?
Which stocks are the best?
In fact, the preponderance of your return is going to come from your asset allocation, i.e. the mix of stocks, bonds and cash in your account.
That’s the big question to focus on first: Not which stocks, not which mutual funds, but the overall balance of stocks, bonds, cash.
How do you choose the right mix?
One method is to use the formula, 100 or 110 minus your age* to determine the percentage of equities in your mix. If you’re 40, you’d want 60% to 70% in equity mutual funds.
A better way, I think, is to use your plan as a foundation: If you want to retire in 30 years and you need $X to live on, and you can afford to save $Y a year, how much growth do you need to get to $X?
Your stock or equity exposure provides growth, but it involves risk. So you also have to ask yourself, if I’m aiming for 6% growth, can I stomach that much risk? Can I save more instead? Adjust my goals? There are different levers you can pull.
You’ll revisit your asset allocation over time, but the important thing is to know where you stand now, what your needs are, and invest accordingly.
*110 may work better for women; this gives them more growth, for a longer lifespan.
Carl Richards, aka "the napkin guy", and father to three daughters and one son, is renowned for his weekly sketches on the NY Times Bucks Blog.