How to Change Your Retirement Plan
Retirement is one of those things that can’t be avoided, but how you get there will change throughout your working years. Many people saving for retirement pick a number in terms of the amount they think they will need and base their investment plan on that, never stopping along the way to change or tweak it. But life happens for the good and the bad, which can require an overhaul of your retirement investment plan. (For more, see: Analyzing The Best Retirement Plans And Investment Options.)
For some, it’s a big jump in salary which is going to require investing with taxes in mind, while for others a layoff or job loss may cause them to accelerate the amount they save once they start working again to catch up. But those are only two of the reasons a retirement plan can change, which is why savers have to be flexible and nimble. If you find life isn’t staying in line with your retirement, then check out these three steps to change a retirement plan midstream.
Time Horizon May Require Investment Tweaks
One of the cornerstones of a sound retirement plan is basing your investment choices on your time horizon. The longer you are working the more risky you can be with your investments. The closer you are to retirement, the more conservative you should become. For many people that means having a retirement investment portfolio that is 60% stocks and 40% bonds while they are younger and moving more toward bonds as they age. But that strategy is based on old life expectancy assumptions. Today people can easily live 20 or more years in retirement which means you can’t be super conservative in your investments as you get closer to retirement any more.
If you find your investments aren’t matching with your time horizon then it’s time to make a change. Look over your investments and if they appear to be too conservative get a little risky but be mindful of the fact that you are going to also need to preserve your money as you set out to grow it further. If you find you are playing a little too fast and loose then get a little more conservative in your approach. (For more, see: Using Time Horizons In Investing.)
Life Events Can Alter Your Risk Tolerance
Risk tolerance is one of those things you figure out early on in the retirement planning process since it is going to dictate how you invest your hard earned money. But your risk tolerance is going to change throughout your life for a slew of reasons. For instance, you may have a major life change like getting married or starting a family. Or you may face a significant increase or decrease in your net worth or income. If any of those things happen to you, it’s going to require you to rethink how much risk you can handle. After all, your risk tolerance when you were single may be a lot different when you have a family to look after. Or a significant reduction in your net worth or income may require you to reign in your risky investment behaviors and trade it for a more risk averse approach.
On the flip side, if you come into newfound wealth such as a bonus, a bump in your salary, or an inheritance, you may be able to tolerate more risk than before. In order to get your risk tolerance back in line with your current situation you will have to review your asset allocation. If you are too heavily invested in stocks but want a more conservative investment portfolio then you will have to scale back your stock investments. If you are too heavily weighted toward bonds when you should be able to handle more risk and hopefully potential reward, then you will want to have a greater concentration in equities. (For more, see: Matching Investing Risk Tolerance To Personality.)
Fees Are Getting out of Control
Nothing in life is free and that is particularly true of investing. But how much you pay in fees can vary and have a big impact on your returns. For people who started investing decades ago, investment vehicles like electronic traded funds or ETFs weren’t around. ETFs are attractive because they have lower fees associated with them than an actively managed mutual fund. While no one should make a decision on fees alone, if you find you are paying too much to invest it's time to rework that investment plan.
Regulatory changes require fund and investment companies to disclose their fees more prominently, making it easier for everyday investors to see just how much they are paying for access to this mutual fund or that investment idea. This practice empowers investors to make smarter decisions and avoid paying too much in fees. If you feel you could be paying less than it's time to get out your statements and take a look at the fees you pay. There are many lower cost alternatives investors can move their money into such as an ETF or an index fund that isn’t actively managed. (For related reading, see: How to Lower Investment Account Fees in Retirement.)
The Bottom Line
Investing for retirement is an important aspect of everyone’s life but it isn’t something that is etched in stone. Your savings and investment strategies can change throughout your working life. If you find yourself in that situation then it’s time to look at your risk tolerance, asset allocation and fees to ensure you’re retirement plan matches your current financial circumstances.