We've all heard we should be saving for retirement. What you may not realize is that there is a big difference between saving for retirement and investing toward retirement. Traditional savings, in the form of bank accounts, bonds, or certificates of deposit, are protected by the Federal Deposit Insurance Corporation or other government indemnification. But, you pay taxes on the money before it goes into savings. What most people think of as retirement savings, the tax-deferred kind, are actually investments, and need to be managed as such.
The tax-deferred retirement programs started in the 1970s. The Individual Retirement Account (IRA) program was first. Later, the employer-sponsored tax-deferred plans were formed, known by their paragraph numbers in the tax code: 403(b) for non-profit companies, and 401(k) for everyone else.
The tax-deferred retirement programs started in the 1970s. The Individual Retirement Account (IRA) program was first. Later, the employer-sponsored tax-deferred plans were formed, known by their paragraph numbers in the tax code: 403(b) for non-profit companies, and 401(k) for everyone else.
These plans, and their newer variations have one thing in common. Although the funds placed in the account are tax-deferred, there is no guarantee that the funds will grow over time. Depending on the choices made, the funds could stay the same, dwindle away, or multiply.
When your employer enrolls you in a 401(k) or 403(b) plan, you initially make choices on which funds to invest in, what percentage of your salary to invest, and how much goes to each of the funds you choose. Many employees do this once, when they start a new job, and then don't think about it much.
Many people had a rude shock in the Fall of 2008, when the sub-prime mortgage bubble burst. Many of the market funds in which much of the retirement investments of Americans were held fell in value precipitously. To compound this problem, the market had lagged since the tech bubble burst in 2000, and many workers found their retirement investments worth much less than their original contributions.
The hardest-hit were workers who had contributed for many years, and were making plans based on the perceived value in their retirement accounts. But, others weathered the financial upset with few losses, and have since recouped the value in their retirement investments. The difference was not so much in choices of funds or a particular investment house, but in how their funds were managed.
When you select investments and the percentage allocated to each initially, those choices should be based on the amount of risk you are willing to assume, based on your age and retirement plans. High-risk, volatile funds are balanced with low-risk funds that gain steadily but slowly. In boom years, the high-risk funds tend to grow rapidly. Over time, the bulk of the value of the account is in high-risk funds, which may lose most or all of their value in a major financial crisis.
Manage your retirement investment by reviewing the overall risk factor periodically. First, determine if your allocations reflect risk appropriate to your current plans. Next, balance the values in your account, moving funds between your various investments so the current value reflects the desired risk factor. In times when stock values are down, this will buy more shares in the higher risk investments, so that investment will grow faster when good times return. In times when the high-risk stock values are high, you can shift that value to the slow-growing stable funds, so your portfolio will drop less when volatile stocks fall.
This strategy will even out the bumps in the market, but don't try to chase the bumps with frequent changes. If you don't feel you can make appropriate and timely choices, your can have your investment plan administrator do this for you. This is an option in many plans. If you have an IRA, whether you make regular contributions or a lump sum annual contribution, you should meet with your plan administrator and review your portfolio at least once a year. Taking the time to manage your retirement investment will pay off when you do decide to retire, and beyond. Remember, your retirement investments will be a major part of your income after retirement. Manage it well before and after you retire. You might be able to postpone retirement if your investment doesn't do well, but once you do retire, it needs to continue to generate value for the rest of your life.
