The Road To A Successful Retirement Begins With An Annual Review

When is the last time you reviewed your 401(k) or retirement account? I’m not talking about opening your statement and taking a cursory glance at the balance. The beginning of the calendar year is a good time to do an annual review. Too many times, investors set the deferral rate and investments in their retirement accounts and forget about it. You should annually review your portfolio to make sure that you are (1) saving as much as you can, (2) your risk level remains appropriate and (3) that you have selected the right investments. Reviewing your account annually will help you better understand your financial path to retirement and allow you to correct mistakes that could otherwise linger for years.

Increase your Savings Rate

Research suggests that the single most important factor in achieving retirement readiness is how much you save. The concept of retirement readiness can be boiled down into one simple concept. Will you be happy in retirement without worrying too much about money? We measure retirement readiness as the ability to use your investments to generate income that will replace your salary when you retire. Rather than think about how much money is in your account, make sure you are aware of how much monthly income you can expect that money to provide. Most of the major 401(k) plan providers offer tools that help project how much monthly income you can expect given current savings rate. The example below shows various sources of income, current estimated monthly income goal and your shortfall if applicable. Additionally, the Plan’s investment advisor can often help with retirement planning questions.

Source: Voya Financial

For 401(k) plan accounts, this time of year is a good time to assess whether or not you are saving as much as possible. If you have received a raise, or your financial circumstances have changed, consider increasing your savings rate. As a rule of thumb, the 401(k) industry recommends saving 10% to 15% of your salary. The earlier you start the better off you will be because you will have longer to enjoy the benefits of expected compounded growth. The more money in your account at retirement the more income it will be capable of generating. Remember, generating income in retirement is one, if not the number one purpose of the 401(k) retirement plan account.

Review your Risk Tolerance

Each year, you would be wise to examine the risk level in your portfolio. Theoretically, as you move closer to retirement age, you will want to reduce the risk in the portfolio by lowering exposure to stocks and increasing exposure to bond and bond-like investments. Some people are more comfortable taking risk than others. However, once you’ve determined your inherent risk tolerance, relative adjustments to the baseline as you age make sense. Your Plan’s investment advisor should be able to help you determine the appropriate risk level for your account. Additionally, most plans offer target date funds that take into account your age and automatically adjust the risk level as you approach retirement. This option is like an autopilot gradually reducing the risk as you age. This automatic reduction of risk is referred to as a glide path. When reviewing your retirement account, you should also consider other accounts or assets that might provide income in retirement, including Social Security benefits. Doing so allows you to better measure and set the risk level of all relevant, income-producing investments.

Select the Right Investments

The third element you will want to review is your overall investment strategy. You should examine whether or not your portfolio is truly diversified. Do you have enough exposure to a broad array of stocks; Large, Small, Value, Growth, International, and Emerging Markets. Most investors tend to own a narrow slice of the global stock market, mainly US large cap stocks. How diversified are the bonds in your portfolio? Do you own treasuries, corporate bonds, short-term, long-term, International? If you broadly diversify your portfolio, you are positioning your account to lessen the normal ups and downs that come with investing in the financial markets, while earning appropriate growth.

Assuming your strategy is properly in place, you should rebalance the allocation of each individual investment. Not many people really want to take the time to do this, but it is important. Most retirement plans offer an automatic rebalancing option, which allows you to return investments to their target without calculating the value of trades. Or, you may ask your Plan’s Investment Advisor for help rebalancing. Engaging in this disciplined approach means you will be selling high and buying low, at least relatively speaking.

Think Before You Make A Change

The calendar year end is conventionally used as a marking date to measure performance in the investment world. This means that shortly after the New Year, you will have access to performance information on the funds in your account as well as your account overall. If you stop and think, however, the date is arbitrary. This is not to say that measuring performance should not be tied to the calendar year end. Using the New Year as the date is convenient. Please recognize, though, that more often than not, investing strategies or themes do not conform to our desire to have a neat start and stop on January 1st each year. Work with your Investment Advisor to make sure that you have long-term strategies in place and think carefully before changing them.