People’s retirement needs vary greatly, but everyone will have basic expenditures: home maintenance or rent, transportation, medical care and living expenses. Many Americans hope to be able to travel, golf, eat out and make big-ticket purchases during retirement.
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In order to pay for life during your retirement – and maybe have some fun along the way – you will need a source of income. You will need to set money aside now, and allow that money to grow, in order to reach your retirement goals.
Investment vehicles that are specifically designed for retirement savings have tax benefits, as compared with general investments. An employer-sponsored retirement investment plan like a 401(k), the federal government Thrift Savings Plan or a 403(b) can be one of the most critical elements in your retirement savings picture. In many cases they are the primary, if not only, means an individual uses to save for retirement.
Here is a list of dos and don’ts for your retirement planning.
DOs for your retirement planning:
1. Regularly review (two to four times per year)
the performance and management of all your plan investment options. Look for:
- Consistent performance compared with other funds that have similar investment strategies (e.g. large company growth funds). Consider picking funds that have outperformed their peers each of the past five years. A good source of fund information is Morningstar.com.
- Fund management changes. A mutual fund manager picks which companies a fund invests in or sells. A fund that has historically performed well may perform differently under a new manager. You can access detailed performance information about your funds through websites like Yahoo! Finance or Google Finance.
2. Pay special attention to new funds added to your plan.
New funds are often placed in 401(k) plans to replace under-performing funds. Your employer probably evaluated the new additions recently.
3. Re-adjust your portfolio so your investment allocations match your desired level of risk.
An investment allocation refers to the way you divide your assets across different investment types (e.g., bonds vs. large-cap growth vs. small-cap value). Allocations that have a higher percentage in money market and bond funds are generally less risky than allocations that contain higher percentages of equity-based funds (particularly emerging market, international and small-cap funds). Set your investment allocation to correspond with the degree of risk you are comfortable with in your portfolio. If you have questions about how to proceed based on your risk tolerance level, use an advice option like Smart401k.
4. Match up your current and future contribution percentages.
For some reason many investors are tempted to set their future contributions differently from their current savings. This will likely alter your allocation and result in a higher or lower level of risk than you intended.
5. Take the time to educate yourself about how to invest for retirement.
The Web is full of sites that offer a wealth of financial and investing information, like MSN Money and the Yahoo! Finance Personal Finance section. If you don’t have the time or desire to personally manage your account, we suggest you consider an independent service, like Smart401k, that considers both your risk tolerance and time to retirement.
DON’Ts for your retirement planning:
1. Pour all your money into the funds that returned the most last year.
This strategy can be hit-or-miss and will likely increase the overall risk to your portfolio. It also will throw a diversified portfolio approach off-kilter. Chasing returns is one of the biggest mistakes the average investor makes.
2. Try to act like a professional day-trader with your retirement savings.
Day-traders are professional investors who watch their investments constantly and make trades several times per day in order to profit from intraday price changes in specific stocks. By contrast, retirement investors should be focused on long-term investing and should not attempt to time short-term market movements.
3. Over-invest in your company stock.
Many 401(k) investors are over-invested in company stock, one of the riskiest investments in a 401(k) plan. Remember: a mutual fund provides diversification across a number of companies, whereas company stock is dependent on the performance of a single company. Most advisers, Smart401k included, suggest that you limit your investment in company stock to 10% or less of your total retirement plan investment.
4. Completely avoid risk, particularly if you’re several years or decades from retirement.
Sticking everything in a money market fund guarantees you will not fully participate in any growth the stock market experiences. If you can afford the time to ride out shorter-term market volatility, it makes sense to have some exposure to equity-focused funds.
5. Hesitate to change your investments to adopt a different strategy if you can’t sleep at night.
If the ups and downs of your current investments are creating high levels of stress, reduce the level of risk in your investments. It may help to do some reading about investment.
If you would like assistance with defining a strategy for your retirement plan, Smart401k can help. Our focus is helping individuals construct a diversified portfolio for their retirement account. For more information abouthow to get started contact our team of advisers.