How to Choose the Right Retirement Plan Design

As you invest for retirement, you must make asset allocation, which is how you choose to spread your money across investment types, a primary concern. When you're young, you tend to focus on aggressively growing your money. As you age, however, you want to preserve gains and capital so you'll have a steady income stream as retirement approaches and begins. Several personal factors -- some concrete, others purely psychological -- dictate exactly how you should structure your retirement plan design. No one-size-fits-all method exists.

Experiment with an asset allocation calculator. The Iowa Public Employees' Retirement System provides a good one at its website. This calculator does the math for you, taking into account personal factors and your outlook on investing and economy to let you know how you should spread your money across stocks, bonds and cash over the long haul.

Consider your age. Generally, age is a no-brainer. The younger you are, the more heavily invested you should be in stocks. As you get older, your stock holdings gradually decrease in favor of increasing bond and cash positions. For example, all other considerations being equal, the typical 25-year-old investor should put 80 percent of his money into a variety of stocks -- ranging from those of large companies to foreign stocks -- and the remaining 20 percent in bonds and cash.

Evaluate both how much money you are starting out with and how much you have to invest each month. As the Iowa Public Employees' Retirement System website explains, the more money you have to invest on both counts, the more aggressive you can be with your retirement portfolio since you don't have to worry too much about being "cash poor" during market downturns. For instance, somebody starting out with nothing should strive for the above-mentioned 80-20 mix, whereas a person with $100,000 to invest at the outset and $7,500 available to invest annually can increase their stock allocation and decrease their bond and cash holdings by about 5 percent apiece.

Consider your tolerance for risk and your personal view of broader economic prospects. If you can accept a high level of risk -- think about how you would react to a 20 percent drop in your account value -- and you're bullish on the economy, you can afford to be more aggressive with your retirement allocation. If you're skittish about risk and pessimistic on the economy, tend toward a higher percentage of relatively safe investments, such as bonds and cash in the form of certificates of deposit, money market accounts and savings accounts. Of course, as you near retirement, your tolerance for risk should naturally decline, particularly if you'll need to use a good chunk of your retirement savings.


  • Max out contributions to your workplace retirement plan if you have one. Follow that by making the maximum allowable contribution to an IRA every year. These moves provide significant tax benefits today and over the long term. Put excess money into taxable accounts.
  • Rebalance your portfolio periodically. As the U.S. Securities and Exchange Commission suggests, you should evaluate your holdings from time to time. Sell off positions in segments of your portfolio that become overbalanced. Make purchases in underrepresented categories.
  • Diversify. An 80-20 mix of stocks and bonds does not mean that the firm you work for or your favorite oil company should dominate your 80 percent stock position. Spread the wealth between stocks of big, medium and small-size companies as well as international stocks.

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About the Author

As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.