Our retirement accounts may lie around like unread magazines - something we will get to later but not now. A collection of IRAs and 401K (403B etc) plans are waiting for attention to ensure that the right funds and strategies are being applied. This is what will see us through our retirement and yet we put off dealing with them.
Your nestegg needs your attention. Increasing your returns by 6% doubles the size of that nestegg in a decade. There is a good chance that your neglected retirement plans could give you a higher income when it comes time to retire.
Often what stops you is a lack of knowledge and the fear of the unknown. If you have an IRA, the freedom of choice can either paralyze you because there is simply too many alternatives. 401K plans have defined choices and perhaps you don't know which selections to make. Dig out a recent 401K statement (or IRA) and see what your three and five year annual rate of return is (ARR). If your ARR is below 3% then you should read on as there is upside for you
SIB (Simpler Is Better) portfolios are based on simple asset allocation implemented using market index funds that can be measured for performance. We are going to use a SIB to see what is realistic and determine whether the gains are there to make a change to a portfolio.
The simplest form of this strategy is to 'buy and hold' (Strategic Asset Allocation or SAA) the assets and only rebalance the asset ratios periodically.
Over the past decade 'buy and modify' (Tactical Asset Allocation or TAA) evolved whereby you keep the same asset classes but you may change the ratios depending on market conditions. For example a 60% bonds, 20% US stocks and 20% international stocks portfolio may see the bond and US stock ratios increased at the cost of the international stocks when international economies are faltering.
We compare the results of a 5 asset class SIB portfolio with low cost ETF funds against a leading 401K plan. You can plug in your own numbers for your own 401K or IRA.
A five asset class SIB implemented with Vanguard ETF's with a moderate risk profile has delivered 5 year annual historical returns of 8% for strategic asset allocation and 14% for tactical asset allocation. Contrast this with the IBM retirement plan of 5% and 11% for the same strategies over the same period. Be aware that these are comparisons of like strategies. So, if you were using buy and hold (strategic asset allocation) with the IBM plan, you would be in the 5% range and if you wanted to use tactical asset allocation with and IRA you would be in the 14% range - that is a big difference.
What to do? Find your latest 401K and IRA statements and see your annual rates of return - some sites will calculate that for you. Then compare what you are getting with what's possible. Finally decide what you are going to do about it. Remember, you are talking about your retirement.
Simon was an early user of the system during its development and uses it for his retirement accounts.
-Simon Napper
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