By Mindy Charski
What does the Labor Department say is likely to be the most expensive thing you’ll ever buy in your lifetime? Your retirement. That knowledge can be shiver inducing, yes, but it can also be empowering.
After all, it’s a reminder that you can take steps today to grow your money for a distant, or not too distant, tomorrow. Here are nine tips to help you invest for the long term.
1. Take full advantage of retirement investment vehicles.
“If you can, every single year, max out those retirement accounts,” says Cary Carbonaro, author of The Money Queen’s Guide: For Women Who Want to Build Wealth and Banish Fear. And, when you’re over 50, make a “catch-up” contribution. In 2016, for instance, those eligible can make a catch-up contribution of up to $6,000 into a 401(k) and up to $1,000 into an Individual Retirement Account (IRA).
Even if you can’t contribute the maximum amount to an employer-sponsored retirement plan, save enough to qualify for the company match. “That is free money,” says Carbonaro, who is also managing director at United Capital of New York and New Jersey, a financial management company.
2. Don’t play it too safe.
Carbonaro has found that many women go too heavy in bonds or cash in the form of money market funds. That’s a problem, she says, since by doing so they miss out on market upswings and often see returns that don’t keep pace with inflation.
“I think women are really afraid of the stock market in general,” Carbonaro says. “They have such a more conservative view of the world, and they’re so nervous about stock market swings.”
Do invest assets in the stock market and keep contributing to your retirement plans even when the markets get scary. “If the markets are going down, and you’re adding into that bucket, well, you’re buying it on sale,” says Cathy Pareto, president of Cathy Pareto and Associaties, a financial planning and investment management firm in Coral Gables, Florida.
3. Diversify your holdings.
Though you don’t want to invest too conservatively, you do want to reduce your risk by choosing different kinds of securities. “The more you spread out your risk, the less your value will go down when the market goes down,” says Laura Guerrero, a financial advisor with Edward Jones in Whittier, California. “We don’t want to beat the market or even emulate the market, because if we do that, then the risk is when it goes down, we’re going to go down just as much.”
You want exposure to some stocks and bonds, since the two generally move in opposite directions. Within those, you want to have different kinds of asset classes. That may mean a mix of large, small, and midcap (capitalization) stocks in various industries, for instance, and bonds with different maturities and issuers.
Likewise, don’t hold too much of your employer’s stock since it can present huge risks if the company or sector tanks. “If you are in a company, your biggest asset is your ability to earn at that company,” Pareto says. “By piling into the corporate stock of the company you work for, you’re [getting] double-risk exposure.”
4. Rebalance at least once a year.
Take time to tweak the weightings of your assets to your desired levels. That’s important because portfolios regularly shift with market ups and downs. You may find your initial allocation of 60 percent in bonds and 40 percent in equities has completely flip-flopped. Or maybe you planned to put 2 percent of your funds in emerging markets, but now those make up 8 percent of your portfolio. These kinds of changes alter your exposure to risk, which you should try your best to control.
Pareto suggests creating a system, maybe planning to rebalance every summer or at certain trigger points, like when an asset class exceeds its target. “If you don’t systematize, you might be tempted to have that emotional aspect in the decision making, as opposed to something concrete and rules-based,” she says.
5. If you change jobs, roll over the money in your employer-sponsored plan.
Many people who keep their funds in the plan of a former employer don’t actively manage it. “What happens when you let it linger, out of sight, out of mind, is you forget about it, you don’t rebalance it, and it becomes like an orphan plan,” Carbonaro says.
One option is reinvesting your savings in a new employer-sponsored plan, but Carbonaro recommends rolling your savings over into an IRA, since you won’t be limited to only a small number of investment choices offered by an employer.
While IRAs have limits on how much you can put in them annually, the cap doesn’t apply for rollovers, so it’s fine to move a large chunk of funds from a previous 401(k) or 403(b). The money remains tax-free if you roll it into a traditional IRA; you’ll owe taxes if you roll it into a Roth IRA.
Don’t, however, be tempted by the additional option of cashing out the plan before age 59½. “That’s like the kiss of death,” Carbonaro says. “First, you’ll pay a 10 percent penalty, so on a $50,000 plan, a $5,000 penalty. Then, that $50,000 is added to your income that year for taxes, so you’ll have to pay potentially another 28 percent to 30 percent. So you just lost between 38 and 40 percent of your nest egg.”
6. Keep tax-exempt investments out of retirement plans.
Retirement portfolios are already tax deferred, so your money grows tax-free until you withdraw it, which is likely when you will be earning less income and have a lower tax rate. Putting tax-exempt securities like municipal bonds into an IRA is unwise, Carbonaro says. That’s because you won’t get a tax benefit and yet you’ll likely get a lower yield than you would with other fixed-income securities like corporate, government, or high-yield bonds.
7. Research mutual funds carefully.
With so many funds to choose from, it can be difficult to pick good options. Guerrero suggests looking for ones with portfolio managers who have been managing funds for 25 or more years and have been through different market cycles. She also considers the track record of a fund over 10 or more years.
Likewise, she takes fees into account. “There are some mutual funds that have management expense ratios that are pretty steep, and that’s not really something that a lot of people catch because not many people read the prospectus,” she says.
8. Build and keep a long-term investment focus.
Setting a strategy early can help you get through the inevitable anxieties of choppy market conditions later. “We remind people that one day in the market, one or two years in the market, does not dictate their whole financial plan,” Pareto says. “Investing for retirement is not supposed to be a sprint. It’s a marathon—it’s years in the making.”
Selling in the middle of a storm is one of the worst things you can do, she says. “The best and most boring course of action is the buy-and-hold way,” advises Pareto. “It creates more successful outcomes if you’re able to separate your emotions and not obsess over your portfolio on a day-to-day basis, which is very dangerous.”
9. Dedicate yourself to saving.
If you’re fortunate enough to be able to contribute the maximum to all of your tax-advantaged retirement plans each year and still have discretionary income left over, direct funds to a brokerage account earmarked for retirement and be systematic about contributing to it, says Pareto.
“Everybody stresses about the investment component and maximizing returns, but I think the biggest hurdle is saving enough,” Pareto says. “That’s really what makes or breaks a retirement plan.” DW
Mindy Charski (@mindycharski) is a Dallas-based freelancer who specializes in business journalism.