Retirement ready: four steps to 401(k) success.

• Author: Jefferies, Lon
• Position: Money Talk

Tired of relying on market timing, outstanding security selection and luck to grow your 401(k)? These four steps will help you stay on pace to meet your retirement goals.

1. Contribute!

   Contributing enough to obtain your employer's full match must be automatic. People who save 15 percent of their gross income are usually comfortably on pace to retirement. For instance, a 30-yearold earning an average of $60,000 throughout his career would need to contribute 10 percent of his salary and receive a five percent employer match each year to build a $2 million nest egg by age 65, assuming a nine percent return. Consistency is the key.

2. Allocate

   Develop a portfolio with the appropriate mix of stocks, bonds and cash to provide sufficient return to reach your goals while not increasing risk. A 30-year-old shouldn't hold only cash and miss years of market growth. Similarly, a retiree shouldn't be invested exclusively in stocks the next time the market has another year like 2008. Apply this general formula to estimate an appropriate allocation:

   110 - (your age) = % of stock in portfolio

3. Diversify

   It's important to not have all your financial eggs in one basket. For instance, large cap stocks should be considered one basket within your diversified portfolio, as should mid cap, small cap and international stocks. U.S. government, corporate and international bonds should also be represented. Having assets diversified among these seven baskets ensures that if one basket breaks, you'll still have other baskets supporting your financial future. When the stock market lost 37 percent in 2008, U.S. government bonds gained 23 percent. Clearly, diversified portfolios decline less during periods of market deterioration.

   However, diversification can be challenging within 401(k)s. Many employer retirement plans consist of only five to 20 investment options, making it difficult to fill multiple baskets. Further, many 401(k)s have just one small or mid cap stock option and that fund may have a history of underperformance. In this case, the investor must either invest in a poor fund or not diversify. Finally, utilizing cost-effective mutual funds is critical but this can be another difficult goal with so few investment options.

   Determining whether your 401(k) has a self-directed option can alleviate these problems. A self-directed option enables employees to move their 401(k) funds to a brokerage firm with access to 2,000 to 3,000 mutual funds. Accordingly, it's...