January is a good time to make an appointment with your financial planner—or find one if you don’t already have one—to make sure your retirement plan is growing in the right direction.
1. What’s the current value of my retirement investment portfolio?
“People often have little idea of how much their retirement portfolio is worth,” says Perry. Ideally, you should look at your overall balance once a year and compare it to previous years. You may be reviewing more than just your work 401(k) plan; if you have personal investments or savings you’ve earmarked for retirement, your planner will tally these up with you as well.
Once a year is usually often enough to review your portfolio, says Perry. This helps you maintain a long-term view of how your investments are doing. It can also reduce your financial anxiety. “Annual reviews help mute the short-term market noise that you can get from the 24-7 financial and political media,” he says.
2. How much annual income will I need in retirement to cover my expected living expenses?
Your advisor can help you make an educated guess about how much you’ll spend in retirement. Then—particularly if you’re within 15 years of retirement—your advisor will likely take your retirement portfolio balance and multiply it by 5 percent (4 percent if you want to be conservative). The result will be how much you can withdraw from your retirement portfolio per year with a high likelihood of it lasting 30 years. For example: a $300,000 portfolio x 5 percent = $15,000/year of spendable money. According to Perry, this concrete information tells you whether you’re way ahead of the game (“That amount of income is great for me! I don’t need to save another dime!”); on track (“If I maintain my savings rate and get a reasonable return, I’ll be within the ballpark”); or whether you need to take action and save more.
3. Is my retirement portfolio properly diversified among stocks, bonds, cash, and so on? And is my money invested appropriately (not too conservatively or aggressively) for my life situation?
A good planner will help you determine the mix of investments that will allow you to reach your retirement goals with the least amount of risk, says Perry. Diversification is a big part of that. A diverse portfolio helps provide exposure to stocks so your investments at least keep pace with inflation—and possibly grow. Investing in less-volatile bonds and cash helps preserve your capital and protects your portfolio from wild swings in value.
Once your portfolio diversification is set, it generally shouldn’t change based on external factors (such as financial market returns or geopolitical risks). However, it can and should change based on personal factors. This is why it’s smart to visit your financial planner every year. For instance, did you or your spouse lose a job or experience a change in salary? Did you come into an inheritance? Have you gone through a divorce? Any of these things can change how much risk and return you seek with your retirement portfolio. Your planner can help you make adjustments.
4. How much am I paying for my investments? Are the costs reasonable?
Over long periods of time, investment fees can make a significant difference in your portfolio’s value. Perry says one major way to reduce fees is to favor index funds over actively managed funds. Your advisor should review your ongoing investment costs. You also face transaction fees for buying and selling investments. Your advisor can help you look for ways to avoid or reduce these costs.
5. Should I consider doing a Roth IRA conversion?
This entails converting all or part of a traditional IRA to a Roth IRA. With a conversion, you pay income taxes today on the converted amount. The money grows tax-free in the Roth IRA and can be withdrawn tax-free in the future. Perry says a key criterion (though not the only one) for determining if a Roth IRA conversion makes sense is if you expect your income tax rates to be higher in future years compared to the current year. This is a complex issue that you should discuss carefully with your planner.
Investing a portion of your money in a Roth IRA is also a way to make sure your retirement portfolio is tax efficient, meaning that you are keeping an eye on how much your investments will cost you in taxes, both now and in the future.
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