Now is a good time to reallocate your retirement plan investments. You’ve probably heard of this before – but what does reallocating really mean?
There are five steps listed below, and it seems complicated, but really it’s pretty simple:
1) Reallocating, sometimes referred to as “rebalancing”, requires taking a look at your overall retirement portfolio. You need to bring together all of your different investment and savings accounts that are earmarked for retirement. You might put this information on a spreadsheet on your computer, or just on a sheet of notebook paper.
For some people, this could take quite a while – if you have several bank accounts, retirement plans, maybe a brokerage account or two, and then some savings bonds, for example, it can take quite a while to pull all of this together. This is why many people don’t bother with reallocation. Believe me, it’s worth every minute of effort! I have a report that describes what could happen if you don’t take the time to re-allocate, and it’s quite ugly. I’ll summarize the report in this newsletter soon, or you can call me and I’ll send it over.
So anyway, go ahead and pull all of the account information together.
2) Once you’ve done this, break down your overall retirement portfolio into three categories – cash, bonds, and stocks. For our purposes, you should consider bond mutual funds, individual bonds, and preferred stocks in the “bonds” category. Likewise, consider individual stocks and stock mutual funds in the “stocks” category. Real estate investments should be considered as a fourth category, if you have those.
3) Now that you have the categories split up, add up each category of items separately, and divide that amount by the overall total. This will give you your current ratio.
4) The next step is a little more difficult. It requires you to think about what kind of “split” you’d like for your investments. For each individual, this split will be a little different. There are rules of thumb that you could use, but in the end, this split is a personal decision for you to make. There are websites that you could use to help you to determine this split (see list at the end of this article).
Some of the factors that you need to consider are your age, the number of years until retirement, your health, and the same factors for your spouse. In addition, consider your children’s education expenses, as these often cut in to the amounts available for your retirement.
Bear in mind that this split ratio will be a number that will change as time passes. For example, a person at age 25 may have a ratio of 90% stocks, 5% real estate, and 5% bonds. When this person reaches age 40, they might wish to have a lower-risk exposure, so they have changed their ratio to 70% stocks, 20% real estate, and 10% bonds. As this example individual nears retirement age, say around age 55, the ratio might adjust to 50% stocks, 20% real estate, and 30% bonds. (Note: these ratios are only for example. As stated, each individual should determine the appropriate ratio for their own personal situation.)
5) Once you’ve determined the ratio that works best for you, compare it to the real ratio that we calculated in step 3 above. All you have left to finish your re-allocation is to adjust your current holdings to match the ideal ratio that you’ve come up with for yourself.
Most retirement plan websites have a facility or toolset that allows you to do this re-allocation quite simply. If that’s not the case for your plan, simply determine which of your holdings that you need to buy and/or sell in order to make your allocation match the ratio that you’ve decided upon for yourself.
And you’re done! That was actually pretty painless, wasn’t it? This process will be much easier next time around (it should be done once a year, by the way!) since you’ve already gone through it once. You’re on your way to financial independence, believe it or not!
If you’re finding this a little more complicated than you feel you can work out on your own, hire a financial advisor to assist you with the task. A fee-only financial advisor will assist you with this kind of task without trying to sell you investments. If you’re interested in is some assistance in reallocating your investment account, especially if it’s your employer-sponsored retirement account, a fee-only advisor is your best bet.
Next time around, we’ll tackle some allocation issues within each classification of investments. For example, we’ll briefly discuss small, medium and large cap stocks, as well as value and growth equities. In addition, we’ll go into an overview of the concept of duration within a bond holding.
Here are some websites that you may find useful as you develop your overall portfolio mix strategy:
www.moneycentral.msn.com – MicrosoftMicrosoft’s MoneyCentral
www.fool.com – The Motley Fool
www.vanguard.com – Vanguard Funds
www.smartmoney.com – Smart Money magazine online
Click the link to pick up a copy of A Social Security Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.
I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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