When you contribute to a 403(b) plan or an IRA as a way to supplement retirement income you may receive from your state pension benefits, it's not a “set-it-and-forget-it” action. You need to pay attention to your investment strategy and periodically make adjustments to keep everything on track.
You don’t have to pour over spreadsheets every day. Use this checklist to conduct an annual review.
Reset your retirement income goal. Your retirement accounts should be focused on a retirement income target, even if that number is just a guess. Early in your career, when retirement is years away, determining how much income you’ll need every year throughout retirement can be difficult. The closer you get to retirement, the easier it is to estimate how much income you’ll need from your investments. Use the Retirement Income Calculator to run “what-if?” scenarios.
Check your investment performance. Review your end-of-year account statement to see how your investments performed. If your statement includes an historical comparison with previous years, you can get a sense of how you’re doing year-over-year. If not, at least compare the performance numbers against last year’s statement. You’re looking for returns that are at least outpacing the inflation rate—preferably by a significant margin.
Rebalance your investment mix. The percentage of your savings you have invested in each major asset class, such as stocks, bonds, and cash investments, is called your asset allocation, and it affects your portfolio’s risk level. Your account statement may provide your asset allocation as a pie chart or in a table showing you how much of your portfolio is invested in each asset class. This will change over time as some investments perform better than others. If you notice your allocation shifting too much towards certain asset classes, consider transferring money among your investments to get your allocation percentages back to where they need to be.
Increase your contributions. One of the best ways to grow your retirement accounts before you retire is to contribute more over time. See if you can increase your contributions to give yourself a better chance to reach your retirement income goal. Use the Retirement Income Calculator to see how saving more might affect your results.
Update your beneficiary designations. Your beneficiary is the person who will receive the assets in your account if you die before receiving them. Life changes, such as marriage, divorce, or the birth of a child, are all good times to review and/or update your beneficiaries to make sure the right people are in line to inherit your money.
Review your estate plan. When you’re young, an estate plan may be just a simple will. As you get older and particularly if you get married and have kids, you’ll want to build a more complete estate plan to protect your growing assets. Make sure all aspects of your estate plan reflect your current family status. Marriage, divorce, birth, and death are the four major life events that impact your estate plan. Even if you haven’t experienced any big changes, check to see that your plan still reflects your wishes.
Go with the flow and adjust accordingly
Long-term financial goals like retirement tend to evolve gradually over time. So there may be years when your annual review takes just a few minutes and you don’t make any changes to your accounts.
But as the years go by, your financial needs and your feelings about risk will likely change. And that will require you to make adjustments to your investment strategy. As your assets grow, you may want to consult with a tax specialist, financial advisor and an estate planning attorney to ensure you’re making sound decisions.