Second in a series of three articles on retirement planning and saving. The first, Setting Sail, discussed how to mentally prepare for retirement saving.

Once you become comfortable with the idea of retirement saving, you now must act on it. Getting started is not made easier by the distant and somewhat uncertain horizon of retirement. Even worse, much of the information that makes it seem complicated is put out by people who want to sell you a get-rich-quick scheme – but there aren’t any. Most of the “secret” has less to do with investment advice than with pure discipline and some simple rules.

But first things first. Before setting up that retirement savings plan make an emergency fund – “charge it” is not a prudent solution every time your car needs repair or you have some other unexpected expenses. You should have two to six months of income in a savings account and then a detailed definition of what constitutes an “emergency” (and a night on the town is not an emergency). Next is satisfying shorter term savings goals – buy a house, replace the car, college for the children. Remember, though, you can always rent a nice place to live (buying a home is probably a sound long-term purchase but should be based on factors other than investment), buy a used car or borrow for college. You can’t borrow for retirement.

Once those more immediate needs are addressed, how to start on retirement savings? The number one determinant of whether you will make your retirement goal is very simple – save early and often (just like voting in Chicago). In the beginning the amount matters less than the commitment to consistently save, even if it’s only $50 per pay period. Over time, as your income hopefully increases, the goal should eventually be to save 10-15% of your income.

Take twin brothers, Adam and Bill. Adam starts saving at age 25 an identical amount each year for 10 years and never saves any more. Bill doesn’t start saving till age 35 and saves the same amount as Adam each year for the next 30 years till he is age 65 and retires. If each of them realize an investment return of anything over 4% per year, Bill will never catch up to Adam’s accumulated account value. Adam saved only for the first 10 years of his 40 year career and ends up with more money than Bill who saved for the last 30 years of his 40 year career. And the gap is massive if Adam continues to save until age 65.

There are a variety of retirement plans to choose from. An employer-sponsored 401k or 403b plan is probably the most effortless way to regularly save, and save at least enough to get the maximum employer match (some employers make a “matching contribution” as an incentive for employees to participate in the plan). If your employer doesn’t have a retirement plan you can use an IRA and can establish an IRA for your spouse even if he or she is not working. Self-employment presents even more retirement plan choices, and you can have multiple retirement plans for multiple income sources. If you are able to save more than the maximum allowed in the retirement plans open an account at a low cost firm like Vanguard, Fidelity or Schwab.

Choosing investments can admittedly get a little more complicated, but do not despair. First, understand two basic kinds of investments: equities (stocks and stock mutual funds) and fixed income (bonds, money markets, CD’s and bond mutual funds). Equities are an ownership share in a company while fixed income is a loan to a company or a government entity. Equities generally have higher return potential, but more volatility (risk and/or possibility of loss); fixed income has lower return expectations, but less volatility. So, invest in a mix of the two: equities for growth and fixed income for relative stability. The ratio of equities to fixed income is referred to as “asset allocation” and a higher share of equities is considered more risky. There are a number of simple ways to identify a starting point for an asset allocation (for example, allocate 100 minus your age to equities or use a “classic” balanced allocation of 60% equities and 40% fixed income) and then make adjustments based on your risk tolerance, objectives and time frame. Generally a longer time frame (more years to retirement) can accommodate greater risk. Establish an asset allocation and stick with it until your situation has a substantial change or gradually make the allocation less risky as retirement nears.

There is more to asset allocation than just equities and fixed income – it is just as important that you not put all your eggs in one basket. Equities should include a mix of domestic and foreign investments and fixed income a mix of intermediate-term, short-tern, foreign and high yield bond funds. There are countless ways to invest in all these areas, but when getting started it is best to keep it simple and that calls for index funds. Index funds passively track a market index like the S&P 500 (large US companies) or the Barclays Aggregate Bond (investment-grade US bonds). While it is impossible to predict how markets will behave in the future, index funds at least offer some assurance that they will perform in line with their market area and won’t deviate due to an investment manager’s decisions. Once your savings program is well established you may consider adding actively managed funds (in which the fund manager makes ongoing investment decisions in pursuit of a defined objective) or work with a financial advisor to more broadly diversify. Over the long term a well-diversified and appropriate asset allocation is far more important to success than the individual investment vehicles.

Finally, you should annually rebalance your investments to your target asset allocation because over the course of a year your investments will change value at different rates. If your target allocation was 70% equities and 30% fixed income at the beginning of the year and equities return more than fixed income, your balance at the end of the year may be 75% equities and 25% fixed income. Rebalancing would require that you sell some equities and buy some fixed income investments to bring the balance back to 70%/30%, forcing you to “sell high and buy low.” This simple technique helps optimize return for a given level of risk tolerance.

Of course, there are other fundamental practices that complement retirement savings, like avoiding credit card debt, borrowing within limits when buying a house and increasing your monthly saving when you get a raise. Still, these ten steps will guide you on the long voyage to your retirement horizon.

1) Establish emergency fund

2) Set short-term and long-term savings goals – house, college, retirement

3) Save early in your career – almost any amount saved early will be significant

4) Save consistently and increase to 10 – 15% of income

5) Save in retirement accounts first

6) Save at least enough to get any “match” available in company retirement plans

7) As pay increases use part of the increases to max out retirement savings limits

8) Establish appropriate asset allocation

9) Establish diversification within the asset allocation

10) Rebalance annually to the asset allocation

(Next: Spending retirement savings)