How much should you put in stocks and bonds?
This is a very difficult question to answer for most people. You have to factor in pension plans, future social security, and other streams of income before deciding how much you will need each month for expenses. A good estimate is that you will need 80% of your current income to be generated by an interest rate of 4-5%. For someone making $50,000 per year, you would need $1,000,000 in retirement funds to live comfortably.
Max out your benefits
You should first try to max out the amounts that employers will match in 401k plans. Matching funds is free money given by your employer to coerce you into planning for retirement. A common match is 50% up to 6% of your income, meaning that your employer will give you 3% of your income on top of the 6% that you saved through the year. You simply cannot beat free money.
Asset allocation
It is hard to say how much you will want to invest in dollar amounts, but deciding how to allocate assets as a percentage is much easier. Conventional wisdom tells us to take 100 and subtract your age from it. That number is the percentage of your portfolio that should be invested in stocks while your age in percent should be in bonds and other fixed income. When you are young more of your assets will be dedicated to growth. As you age, they will be converted into safer investments. At 20 years old you can often absorb a higher level of risk, thus you should have 80% in stock and 20% in fixed income. At 60, it is time to start banking in your profits by converting your portfolio into fixed income investments, 60% bonds and 40% stocks.Monthly contributions are best
The best way to invest is to start early and make monthly contributions to a retirement account. Monthly contributions will help you ride out the ups and downs of the business cycle. Focus first on maximizing retirement benefits then start applying money to other accounts such as IRAs and other retirement portfolios. Employer matches are low hanging fruit–pick it first.
