Working With Time When It Comes to Your Retirement
A blog by Richard Rausser, CPC, QPA, QKA, Senior Vice President, Pentegra Retirement Services – August 25, 2015
Having previously discussed investment strategies and withdrawal (or “decumulation”) scenarios in this space, I thought it would be valuable to take a look at methods of effectively accumulating your retirement savings as well. Simply sitting back and ignoring your 401(k) plan is probably not the most prudent approach.
Not all retirement plans are created equal; your employer may take a proactive approach to its retirement plans. (It should be pointed out, however, that most employers do not regularly redesign their plans.) Even if your employer does not have the most progressive plan design, there are still ways that you can make the plan work better for you.
The shift towards individual participants taking more ownership of one’s retirement plan is based on the fact that most employers no longer offer defined benefit plans – e.g. pensions. Instead, the onus is now on plan participants to take the bull by the horns and put a little more time and effort into managing their retirement plans than previous generations did.
First, you should be saving as much as you can now, but in no event less than the amount necessary to receive the maximum possible matching benefit from your employer. We generally recommend saving at least 6 percent of one’s annual salary for retirement, but, if your company matches dollar for dollar the first 4 percent of savings, make sure you are contributing at least that much to your plan on an annual basis.
If you find that you cannot afford to contribute 4-6 percent of your salary, then start where you can today. “Save early and save often” has become something of a cliché in the retirement savings industry, but it is a mantra that remains valid. Even if you start saving just 2 or 3 percent, you can usually take advantage of most plans’ “auto escalation” features, which can be used to increase your contribution percentage year after year until you reach that key 6 percent target … or higher. Many people schedule the escalation to coincide with their annual salary increase.
The next piece of the puzzle is determining how to invest one’s contributions. Most people are not investment professionals, but they want results similar to what the experts produce. One of the alternatives to consider to achieve those results is to utilize a time-based horizontal strategy, which relies on target-date funds. Basing your savings strategy on or around your expected target retirement date will provide your investment professional with invaluable guidance in designing your investment plan. The difference between a target date of 2020 versus 2025 can have a significant impact on the investment selection and overall performance of one’s retirement fund.
Investors often put at least some of their money into more aggressive investment vehicles, such as stocks or gold. However, the old “set it and forget it” approach can backfire with such investments as stocks and commodities are often subject to greater volatility than other asset classes and their values can rise and fall substantially over time. An aggressive approach can be beneficial if your time horizon consists of a couple of decades – losses incurred by a major stock market plunge can be more easily recouped if you have 20 years to go before retiring – but nobody wants to have built up a significant amount of value just to find the stock market take a major hit as they near retirement.
It is for this reason that investors tend to become more conservative as they grow older. Volatile investments that may promise short-term windfalls may be attractive in the early going, but as with many things, slow and steady often wins the race.
Again, without being an investment expert, how do you navigate this potential investment minefield? This is where target date funds can come into play. These are mutual funds that automatically reset the composition of assets (such as stocks, bonds, and cash) in one’s retirement portfolio according to a selected time frame. Even with an investment professional overseeing your portfolio, however, it is still worth your own time to revisit your asset mix at least once a year. (You can of course do so more often, but readjusting your mix, for example, on a monthly basis may often leave you chasing “hot” investments, which can yield frustration on a number of levels.)
Many 401(k) plans have investment models and asset allocation tools to help participants decide between different levels of risk. It can be beneficial for retirement plan investments to be well-diversified; once more, an investment professional can help you determine which investment strategy is most suitable for you based upon your target retirement date and risk tolerance.
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