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Yahoo! has a top ten list for retirement planning. After yesterday’s story about the number of people having to retire early, it might be a good idea to look over the list and make sure we are on the right track. I will cover the first five today and the last five tomorrow.

1. Save as much as you can as early as you can.
2. Set realistic goals.
3. A 401(k) is one of the easiest and best ways to save for retirement.
4. An IRA also can give your savings a tax-advantaged boost.
5. Focus on your asset allocation more than on individual picks.
6. Stocks are best for long-term growth.
7. Don’t move too heavily into bonds, even in retirement.
8. Making tax-efficient withdrawals can stretch the life of your nest egg.
9. Working part-time in retirement can help in more ways than one.
10. There are other creative ways to get more mileage out of retirement assets.

Save as much as you can as early as you can

Albert Einstein was a pretty smart guy and he knew a little bit about the forces of the universe. So when he said that the most powerful force in the universe is compound interest, maybe we should listen. For instance, let’s say that you invest $5,000 per year and get a 10% return. If you do this for 30 years, you’ll have $1 million. After 20 years, you’ll have $357,000. After 10 years, you’ll only have $107,000. So, if you put off investing in a retirement fund when you’re 25 and start when you are 35, you’ll have a third of the money you’d have if you started earlier when you hit age 55.

Set realistic goals.

Most people need to replace a significant portion of the pre-retirement salary when they retire. It will help to be debt-free by then, but if you plan to move to retire, or have a winter/summer home, you will likely have a mortgage payment. Your car will not last 20 or more years you will be in retirement. Medical expenses will eat into your income. You’ll need to estimate all of these items to see how much you’ll need to earn in retirement. One quick way is to use the “Where am I heading?” calculator from Alliance Bernstein to see how much of your income you are on track to replace when you retire. The nice thing about this calculator is that it puts everything in today’s dollars so that you can see your retirement income. It’s better to actually go through the calculation of retirement needs and expected returns, but using this calculator can give you an idea if you are generally on the right path.

A 401(k) is one of the easiest and best ways to save for retirement.

A 401(k) is one of the easiest, but not necessarily the best. Depending on your situation, you may be better off with a Roth IRA than investing in your 401(k). If you get an employer match, you must save enough to get the match otherwise you are throwing away free money. Otherwise, if you are paying a low tax rate now, there is no incentive to paying taxes later when you may be in a higher tax bracket. Plus, you are limited to the funds in your 401(k). In my company’s old provider, we had a fund that lagged its benchmark by 30% annually over 5 years! How many people were invested in that fund because they set their investments and never checked it? A 401(k) is a wonderful tool for those that do not trust themselves to actually send a check to invest because the money is never in “your” pocket. But it isn’t right for everyone.

An IRA also can give your savings a tax-advantaged boost.

This is true. Like 401(k)s you can make tax deductible deduction to an IRA. The IRA limits are about $10,000 less than the 401(k) limits, so if you have a 401(k) that decision is a no-brainer. However, like I said above you should look into a Roth IRA, which doesn’t give a current tax break but does allow tax-free withdrawals in retirement.

Focus on your asset allocation more than on individual picks.

Most people miss this boat. Just because one set of stocks (*cough* tech) are shooting through the roof doesn’t mean all of your money should be there. Look what happened in 2001 for a sobering reminder of that. You should be well diversified amongst different classes of stock as well as bonds (if you are over 45), real estate, commodities, etc. You should own international stocks as well as domestic ones. The more diversified you are, the less likely a catastrophic drop will happen in your investments. Generally, US and international stocks don’t move in tandem. Commodities generally move in polar opposite to US stocks. Real Estate has different cycles than everything else. Diversification won’t necessarily provide you the best return from year to year, but it’s the clear winner in the long term.