Yahoo Finance Retirement Funds All in One Type of Account? 5 Moves You Need To Make Now
The average retirement savings balance is $333,945, based on recent research from The Motley Fool. With the average retiree receiving only around $23,000 annually from Social Security, it’s clear that you have to ensure you take responsibility for your financial planning if you want to live comfortably in your golden years.
Find Out: How Long $1 Million in Retirement Will Last in Every State
Learn More: The Surprising Way You Can Get Guaranteed Retirement Income for Life
What moves should you make now if your retirement savings are in one account to be better diversified?
Retirement Planning: Whether you're planning for retirement, dealing with a significant life event or simply looking to make smarter financial decisions, a financial advisor can offer the expertise and guidance you need. Here are some compelling reasons why you should consider a financial advisor -- even if you're not wealthy.
Open Accounts With Different Tax Treatments
“As you accumulate wealth, you ideally want to save and invest in accounts with different tax treatments,” said Chris Urban, CFP, founder of Discovery Wealth Planning.
The first move you should consider is deciding whether it makes sense to open retirement accounts with different tax treatments so that you can prepare accordingly for your golden years. This is where retirement planning gets personal, as we all have unique goals and plans for how we want to spend our time once we exit the workforce.
“For example, good tax diversification might mean you have a pre-tax account (a traditional 401(k) and/or IRA), an after-tax account (i.e., Roth 401(k) and/or Roth IRA), and a taxable brokerage account,” Urban said.
Once you retire, you’ll likely want greater flexibility with how you spend your money, so it makes sense to have assets with different tax treatments that you can pull from. Many advisors will suggest diversifying your accounts so that you have more effective tax bracket management when your income drops as a retiree.
“If you have all of your savings in one type of retirement account, consider converting some pre-tax assets to after-tax assets and/or contributing to an account with different tax treatment than the one you already have built up assets in,” Urban said.
As always, it’s critical to be aware of the tax implications of your actions and income and contribution limits when considering your retirement planning approach.
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Spread Out Your Investments
“If all of an individual’s retirement savings are in one account, it’s imperative to diversify this account in order to reduce the risk and volatility of their investments,” said Michael Collins, CFA, founder of WinCap Financial. “This can be done by spreading out savings across multiple investment options, such as stocks, bonds and ETFs.”
The good news is that having your retirement savings in one account doesn’t prevent you from diversifying your investments. Diversifying your portfolio will help you mitigate the possible market fluctuations that are bound to happen.
“While ideally, you will want to contribute to both an IRA and a 401(k) if possible, you won’t necessarily hurt your financial progress by only having one retirement account,” said Erika Kullberg, attorney, personal finance expert and founder of Erika.com.
There are also a few other ways to diversify investments in one account.
Consider Different Industries
“In the 1990s, many investors lost millions when the dot-com bubble popped,” said Scott Lieberman, a financial expert and founder of Touchdown Money. “Those people could have avoided disaster if they’d split their assets among many kinds of stocks, funds and other investments.”
You can look into different industries that can provide high returns in the next few years to help spread out your risks in the one account.
Think About the Time You Have
You can afford to be riskier when you’re younger since you have time to make the money back. This means you can take some chances by investing in industries expected to experience high growth shortly.
“If you’re just starting with your financial journey, you could try investing in other countries to protect against a crash in the American economy,” Lieberman said.
Look Into Mutual Funds
While you can continually diversify your portfolio by investing in a variety of assets, you can also simplify the process by choosing mutual funds for your retirement account.
“A mutual fund works by allowing multiple investors to contribute money to buy a diversified portfolio,” Kullberg said. “This portfolio can contain bonds, stocks and a variety of other securities.”
The diversity of the mutual fund will help you spread out the risks in your retirement account as an investor. The variety of assets and holdings will assist with balancing out any potential losses.
Invest In Target Date Funds
“A target date fund works similarly to a mutual fund but can make meeting your retirement goals even easier while lowering your risks,” Kullberg said. “With a target date fund, your investments will be automatically adjusted over time to lower your risk as you get closer to retirement.”
The goal is to choose a target date fund that aligns with your preferred retirement date. At the fund’s beginning, the investments will be riskier but will have the potential for higher rewards since you have time. As you get closer to retirement, the fund will automatically shift your assets so that you’ll have as much money as possible in your retirement.
“It’s important to remember there are no guarantees in investing, but diversifying your investments can help you reach your retirement goals with less risk,” Kullberg said.
Regularly Review Your Portfolio
“You should regularly review their investments and make adjustments based on their risk tolerance and financial goals, like switching to more conservative investments as they get closer to retirement,” Collins said.
If your retirement funds are in one account, you’ll want to consider opening other accounts with different tax treatments and you’ll want to monitor the performance and diversification of your account diligently to ensure you’re on the right track to reaching your desired number for your golden years.
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