Free From Money

This is part 3 of the retirement planning series.

Part 1 covered the basics of retirement planning.

Part 2 gave you a basic idea on what to invest in.

Part 3 will help you learn what you need to do to maintain your accounts until retirement. Depending on when you open your accounts, that could be a very long time. The good news is that once your accounts are open, maintaining them can be very easy.

Rebalancing

After reading part 2 you should have an ideal investment mix that you would like to use. Over time it is natural for one asset class to outperform another. At that point you need to decide if you will increase the allocation to the highest returning class, let everything stay as it is, or if you will rebalance your funds so that the allocations are back inline with your original plan.

How often you rebalance is up to you. I feel that a six month time frame is long enough that you can let your winners ride, yet not so long that your portfolio no longer resembles what you had envisioned.

Generally I think that it is a wise decision to rebalance your funds to your original plan. Why should you rebalance? In stock markets there is often a reversion to the mean, so putting more money in underperforming assets may allow you to buy shares when prices are low, and sell when the prices are higher at your next rebalance. On the other hand, the market may be different enough from when you originally started that you decide to change the amount going to each fund.

Another thing to consider is the mix of risky assets you own in your portfolio as a function of your age. The younger you are the more you should allocate to risky investments. As you get closer to retirement age remember to move more money into less risky assets like CDs. You wouldn’t want a major stock market downturn to wreak havoc on your retirement portfolio.

Consolidating

Over-time you may find that your retirement accounts become spread out among multiple companies, especially 401(k) accounts. Whenever you change jobs you will likely open a new 401(k) while your former account remains open. This presents two problems. First, a large number of accounts is obviously more difficult to track than a single account. Second, the more accounts you have the more likely it is that you will stray from you investment mix.

To keep your money together it is necessary for you to rollover your accounts from your old ones into the current one that you want to maintain. Unfortunately there is no one single process that every fund company uses for dispersing money. Some companies may remit funds directly to your new account, while others may require you to receive the money and then transfer it into your new account.

Moving funds between two accounts can be a little tricky. You do not want the funds to be sent to you in your name, or you may be hit with hefty fees and taxes. I recommend talking to your HR department at work, or a customer service rep of your new fund company to find out what is needed to transfer funds from an old account into your new one.

That’s It!

Simple right? Managing your own money doesn’t need to be difficult. In fact, the more simple your plan the more likely you are to stick with it for the long run. A few hours of maintenance once or twice a year will keep your accounts earning for you while you’re out doing whatever you want.