Building your Retirement

Where to begin? Retirement planning is by no means an easy task, but it's necessary. One of the key strategies for long term investing in my opinion is asset allocation. The other is diversification.

Asset Allocation is a strategy used to leverage risk against reward by assigning a dollar value (or percentage) to a particular asset based on your risk tolerance level.

For me, because I plan to retire 35 or more years down the road and a relatively aggressive risk tolerance, I have roughly 90% of my portfolio dedicated to stocks/equities and 10% to bonds. Because I have such a high percentage in equities, that gives me more exposure to the risks of the stock market, and less insured income from bonds. As I get closer to retirement, however, I intend to adjust my portfolio accordingly to secure more income by having a higher allocation to bonds and lower my equities exposure. So when my retirement date comes in about 35 years, my hope is that my asset allocation will have flipped to 10% in stocks and 90% in bonds.

Some companies customize mutual funds with your retirement goals and risk tolerance level in mind. Vanguard has a list of all of their retirement balanced funds that are designed so that the asset allocation will be adjusted as the client gets closer to their retirement age. You can find that list here. They also provide IRA and individual/joint broker accounts, so if you're looking to open an account, you can do so with Vanguard.

Diversification is a strategy used to vary the content of your portfolio and  to avoid a heavy concentration of money allocated to a particular stock, mutual fund, ETF or bond.

When you have varying views or perspectives any business can benefit so even companies diversify their various portfolios. Companies offer multiple types of products to offset risks of only having one money generating product or to get into a new and growing business that aligns well with their current operations. 

Diversification is primarily used in an investment portfolio to vary the industries and companies you are invested in. For example, my investment group currently has ten holdings and this is a small snapshot of  how our portfolio is diversified:

Based on actual portfolio diversification metrics

We have a good bit of diversification, but we sill have a pretty high concentration in the healthcare industry. We are also heavily exposed to financials and the consumer discretionary industries as well. We intend to look for companies in the unrepresented or under represented sectors in our portfolio such as the energy, consumer staples and information technology sectors. Another option for diversification may be to look into international exposure through mutual funds.

Asset allocation and diversification can be applied to all aspects of investing. By no means are these two principles limited to your retirement portfolio. You can have real estate, stocks/equities, venture capital pursuits and many other money generating streams to make up your wealth portfolio. How well you diversify your portfolio and allocate particular portions of your income in each is reflected in the outcome of your long term investments.

Until next time...

So you're eligible for the retirement program at work...now what?

After your first 90 days at your new job, you received an extensive email explaining the details of the Retirement Investment Program that is now available to you. Other times you'll get a large packet of information in the mail from the investment company on behalf of your place of employment with information on the 401k or 403b accounts you can open. Regardless of how you receive that information, it is filled with a truck load of information that is hard to digest. Then to top it all off they only give you 30 days to read through all of it, understand it and make selections. If you fail to make that deadline, you have to wait until the next eligibility period arises and that can be anywhere between 90 and 365 days away.

That process can be exhausting and overwhelming...

I know. I've been there. But I was fortunate enough to walk into that situation knowing exactly what my plan was going to be. When I received that lengthy email, I noticed that my company had a matching program. At 21, I knew I was going to contribute the minimum percentage necessary so that I would be able to get my company to match 50% my contribution each pay period. Here was my thought process:

If I contributed 6% of my pay check every month to my account, my company would contribute 3% of my paycheck amount to my account. And that money is not coming out of my pocket, but my company's pocket?

THAT, MY FRIENDS, IS WHAT I CALL FREE MONEY...NEEDLESS TO SAY, I TOOK IT!!

Should your company have a matching policy for the retirement account, take your company up on that policy. Matching policies are there for you to take advantage of and if you don't, you're leaving money on the table that could add up to being that trip to Italy at age 62.

I also knew I needed an account that was going to benefit me with taxes now versus down the line because I didn't make a lot of money right out of college. I needed all the tax help I could get because my main goal was to have more money now to invest so by the time I get to retirement I have my retirement plus money in my own brokerage account as pocket change. So the kind of account I chose was a traditional 401k, which took money out of my pay check pre-tax, lowered my taxable income and gave me a good tax return that I was then able to invest.

I was relentlessly researching these topics in college, long before I knew I was going to have a job once I graduated. Retirement planning probably wasn't a pressing issue for you when you were in college, but it is now and that's why we are talking about this here. If you haven't opened up your retirement account and you have the ability to do so, I say do it now!

The kind of retirement account you open should be dependent on your personal money habits.

If you're like me and really like the idea of an upfront tax break because you have plans to invest or save your tax returns, I say go for a traditional 401k or 403b. Just know that when you do take that money out at your retirement, you will be taxed according to your income tax bracket at retirement.

If you think you'll be making significantly more at retirement than you make now, putting your income in a higher tax bracket AND you dont intend to save or invest your tax returns, I'd consider the Roth 401k or 403b. Money that is put into these accounts are taken out of your monthly pay after taxes have been applied. You are paying taxes on that money now versus when you enter retirement.

Now who is to say you can't have the best of both world though? You actually can have both. The only thing with that is that the sum of your contributions to both accounts cant go over the annual dollar limit. Those dollar limits vary each year and by how old you are at the end of a particular year.

The goal here was to help you navigate the financial gray cloud of company sponsored retirement investment plans. Hope some of this helps clear the air. As usual if you have any questions leave them below.

Until next post folks...