subject: Retirement Planning [print this page] Now that you have decided which retirement plan is right for you, you must ask yourself what is the proper allocation? What is my time horizon? Am I a growth or an income investor? What is my asset breakdown?
Here are 5 steps to consider when choosing the allocation that is right for you:
1.Complete a risk/reward profile. This will give you an idea of what type of investor you are. Are you able to handle the volatile fluctuations in a given portfolio? For example, if your portfolio dropped 20% in 6 months would you:
a. Sell the entire portfolio.
b. Sell half of your investments and keep the other half invested.
c. Buy more (dollar-cost average).
d. Change nothing.
2.Be more aggressive. With regard to retirement assets, you may want to consider taking on incrementally more risk than you would normally be accustomed to in non-retirement accounts. Since you have a longer time horizon, you can withstand the short term fluctuations. Retirement accounts have penalties if withdrawals are made prior to 59 . The penalties are imposed to discourage dipping into assets meant to be utilized upon and during retirement.
3.Choose investments that might be traded more actively, or have higher potential for tax implications. Investments that might be held for less than 1 year would be taxed at ordinary income and not long term capital gains rates. Put these investments in your retirement accounts. Since the accounts are tax-deferred, no taxes will be generated until a distribution is made.
4.Consolidation of retirement accounts if you have multiple IRAs or old 401(k) or 403(b) plans from prior employers.
Why Consolidate?
a. Easier to keep track of your investment allocation, especially if held at one institution.
b. Control of assets. If you decide to rollover your 401(k) or 403(b) to an IRA, you then have the ability to pick and choose your investments. Typically employer sponsored retirement accounts have limited options. Take advantage and roll over your assets into an IRA.
c. More options.
d. Lower fees.
e. Easier to calculate RMDs (Required Minimum Distributions) You are required to take distributions from your IRA accounts beginning at age 70 .
5.Take emotion out of the equation. We are looking to make smart decisions with our money. Smart decisions are made based on well thought out facts, not on gut feelings and short term focused reactions. This is not gambling; this is investing. It is crucial to be educated and involved in your financial plan.
Now that we have chosen the right plan (Article 1), we can now figure out the proper allocation by going through the steps above. In the forthcoming article, we will demonstrate how to implement and continuously monitor your retirement plan. The primary theme is to have a sound financial blueprint that is able to navigate through any and all conditions.
Retire comfortably and remain comfortably retired.
