Rebalancing Act to Keep Retirement On Track

This is a guest post by Kelley C. Long.  She is a a nationally sought-after personal finance expert.  You can find and follow her on her KCL Money Coach website or at @kclmoneycoach on Twitter.

These days most professional women who have been employed full-time for at least one year have access to an employer-sponsored retirement plan such as a 401k, 403b, profit-sharing or similar benefit. Moreover, being conscientious savers who prepare for the future, most women participate at least to the extent that their company will match. (Side note: If your employer offers a 401k match that you are NOT taking advantage of, I recommend you begin as soon as possible. Don't pass up free money!) 

Keep Retirement on Track

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After the initial setup of their retirement accounts, women often struggle to ensure that they are maximizing the options available as time goes on. They have a tendency to choose the investment allocation then "let it ride," and rarely, if ever, do they make changes. Without taking control of investment and making the appropriate changes, the opportunity to achieve the best performance possible often is missed. 


Maximize Your Money

Keeping your retirement savings on track, however, does not require an excessive amount of time or investment expertise. What it does require is a systematic, unemotional approach. A woman being unemotional may sound crazy, but it very well could be the key to maximizing the money you are stocking away each paycheck. Here's how: 

First, let's start with a quick overview of choosing the correct allocation of contributions. Most plans offer a variety of mutual funds that allow participants to diversify savings across all investment categories, such as Large Cap, Mid-Cap, Fixed Income and International. It is important to spread contributions among the categories, but how much you put into each depends on your time horizon and risk tolerance. In general, the more time you have to save, the more you should allocate toward stock investments, which are more volatile (like Large Cap, Mid-Cap, International), and less toward fixed income investments (bonds, T-bills and money market). 

Once you have selected your contribution percentages and started funding your retirement account, set a reminder to revisit it in six months. This is where the unemotional part comes. Every six months, regardless of the performance of your investments, you should rebalance your portfolio back to the original allocation you set for your contributions. This will require selling funds that have outperformed and adding to funds that have underperformed, which is counter-intuitive to what feels right. Why sell from a fund that is doing well to add to one that lags? Because you are not looking to win a sprint by investing all your money in one winning fund. You are striving to finish the marathon with a steady and reliable pace. 

As time goes by you also need to shift your allocation toward more fixed income and away from stocks in order to stabilize the portfolio's volatility. An easy rule of thumb that I share with clients is to shift five percent from stocks to fixed income every five years. For example, if your allocation is currently set to 80 percent stocks and 20 percent fixed income, then in five years you might consider changing your contribution percentages to 75/25. However, the specific allocation recommended will vary according to each person, depending on age, risk tolerance, goals and options available in the plan. Consider enlisting the help of an expert by consulting with a financial coach, a financial planner or your company's retirement plan representative to help you decide on your allocation. 

Above all, by investing just a few minutes of time every six months to rebalance your retirement account, you will be taking a more active role in securing your future and ensuring that your hard-earned savings will be working just as hard for you.


Question:  Are you focused on your retirement account?   


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