No matter what your perfect retirement looks like, it’s easier than you think to get there. By focusing on a few key elements of your investing plan, a little re-adjusting today can get you to your dream sooner than you think.
We’ve boiled it down to 9 key things that add up to a healthier investment strategy and safer retirement
1. Diversify your portfolio to help minimize risk and maximize returns
Why it’s important:
We’d all love to have been the smart investors who got in early on Apple or Google and
held on to this day. Unfortunately, years of analysis on investors, managers, and the market
has shown that most investors, including the pros, just aren’t good at picking stocks. Most
investors also simply aren’t good at timing or predicting the market. Research from
DALBAR shows that investors can essentially be their own worst enemy, typically giving up
4% a year in returns relative to the overall performance of the stock market. 4% may not
sound like much, but it equates to losing $10,000 every single year on a $250,000 portfolio!
There’s no need to throw up your hands and assume that investing is too complicated to be worth it. Diversifying your portfolio by holding investments comprised of a wide range of companies and geographies will help you smooth out your returns over time, go a long way toward matching the markets’ performance, and maybe even outperform some of your fellow investors. Diversification is a core tenet of Modern Portfolio Theory, a tried and tested approach to investing, based on Nobel prize winning research, and is used by many portfolio managers. It works on two levels:
1. Asset Class
Different asset classes do well in different situations and they each play a specific role in a portfolio. The main asset classes in which we invest at FutureAdvisor are stocks, bonds, real estate, and inflation protected securities. Together, these offer growth as well as the potential to preserve capital during 1. Diversify your portfolio to help minimize risk and maximize returns Page 4 of 16 9 Core Retirement Tactics To Help You Retire Sooner | FutureAdvisor weaker markets. We often see in the news when the U.S. markets are doing well, but check out this interesting infographic to see how various asset classes stack up over the last 15 years.
The market may be soaring in India, but plummeting in Greece. Broad international exposure can help
manage this risk, which should expose you to bull markets wherever they may occur
Here’s the takeaway: When constructing your retirement portfolio, aim to diversify by asset class and geography while
keeping your investing fees low, (more on keeping fees low, next). Unfortunately, many investors
believe they are well diversified but instead have far too much money invested in the U.S., missing out
on global diversification. This phenomenon is known as “Home Bias” and it is exhibited by investors
around the globe. Don’t be one of them!
Curious how diversification could work within your portfolio? For an example of a
personalized allocation based on the above tenets, sign up for free. In less than 2 minutes,
you’ll get personalized diversification recommendations.
2. Minimize your investment fees
Why it’s important: You get what you pay for -- right? Actually...it turns out that this isn’t really the case when it comes to investments. A growing body of evidence shows that funds with higher expenses do not, on average, perform better than lower-expense funds. In fact, research indicates the average actively-managed fund performs worse than a low-cost index fund.
Investment fees come in 3 main flavors:
1. Trading Fees.
These are the fees investors are charged when they buy or sell a stock, fund, or other asset. The actual cost can vary greatly, depending on the broker the investor is using, and these fees can add up if an investor is actively trading. Commissions are a large part of trading costs, but bid/ask spreads and the tax implications can also drive up your costs if you trade often.
How to keep trading fees low: Invest using commission-free ETFs offered through brokers like TD Ameritrade, Fidelity, Vanguard, and Charles Schwab. Since ETFs are comprised of a basket of individual stocks, but is traded like a common stock, and has the added benefit of diversification.
These are the fees charged by the managers of the ETFs and Mutual Funds. Fund fees can typically range from 0.2%-2.0%. They are typically comprised of a management fee (what 2. Minimize your investment fees Page 6 of 16 9 Core Retirement Tactics To Help You Retire Sooner | FutureAdvisor they charge for picking the equities which the fund is made up of), administrative costs (what they charge for customer service, record keeping, etc.), and 12B-1 fees (what they charge for advertising the fund to people like you). Some mutual funds also charge load fees when you buy or sell the fund, these have declined in recent years but can average 1% of your investment, ETFs don’t have these load fees.
How to keep fund fees low: Invest using low fee ETFs, instead of higher fee mutual funds. Because ETFs often require significantly less management and sales support, they are less expensive to operate, and that savings is passed on to you.
3. Advisor Fees
These are the fees a financial professional will charge you for providing financial guidance and making trades on your behalf. Most advisors charge their clients based on the amount of assets they are managing for the client. These fees are often 1% or more, and can take a large bite out of your total portfolio assets.
How to keep advisor fees low: If you’re not a DIY’er, and heck, most of us are not - especially when it comes to investing, consider using a digital investment advisor (sometimes referred to as a Robo-Advisor). The advisor fee is often half the cost of a traditional advisor with no downside. Some, like FutureAdvisor, even give you access to a licensed financial advisor on staff if you need hand-holding, or have complex questions. When shopping for a roboadvisor, don’t necessarily go with the cheapest option, after all, this is your nest egg! Be sure you understand what services are being offered and what access to a licensed advisor the company offers. Think about it like this, you wouldn’t go with the cheapest tattoo artist, or heart surgeon, for that matter. Protect your future generations’ wealth with quality advice.
Here's the takeaway: Always pay attention to how much your investments are costing you - after all, your goal in investing is to grow your pool of funds as much as you can. Anything that comes out of your pocket today is money that isn’t available to grow in the future. Compounded over time, fees can make a huge difference in what you have available when it comes time for retirement.
Do you know what fees are costing you?Find out in under 2 minutes
3. Invest Idle Cash
Why It's Important: Investing on your own can feel overwhelming. When you’re not sure of the best path forward, it may feel like the safest thing to do with your cash is simply nothing, at least until you come across something you feel confident about investing in. Or you may not feel that it’s the right time to enter the market, thinking it’s better to wait for a dip so you can “buy low.” However, the data shows that trying to time the market doesn’t work much better than flipping a coin. If you factor in inflation, it turns out that the S&P 500 has been within 10% of it’s “highest point ever” for over 60% of the time since 1980!
Unfortunately, as you’ll remember from earlier, research has shown that trying to time the market doesn’t work. Instead, make regular contributions to your investment accounts, over time, and as you have excess cash to put to work for you. While it’s impossible to predict the market, at least you’ll avoid the certainty of losing to inflation that comes with keeping money in cash. And since the market generally rises over time, why bet on paying higher prices in the future?
Here's the takeaway: Make sure you set aside enough cash for emergency needs, and invest the rest. Don’t try to time the
4. Consider Rolling Over Your Old 401(k)s
Why it’s important: Quick -- what fund fees are you currently paying for the money you have in a 401(k)? How about the admin fees? And how many investment choices are available to you?
If you’re not sure of the answers, you’re not alone. Given that the average American now changes jobs every 4.6 years, it’s easy to lose track of old 401(k)s when you begin a new job -- it can feel like the last thing on your mind as you adjust to a new role and haggle over a new salary.
However, slowly but surely losing your hard-saved money to compounding fees over time can make a huge impact on your future account balances. So, don’t be thinking just about your new compensation package when you switch jobs -- take advantage of the opportunity to consider rolling over your old 401(k) to a Rollover IRA account so you can minimize a whole wealth of fees: trading, commissions, management, and so on. And don’t forget that you’ll almost certainly gain access to a wider set of funds than was available within the confines of your 401(k).
Here's the takeaway: If you have an old 401(k), there’s a decent chance you’re overpaying, and you have fewer investing options. Don’t delay, consider rolling it over into an IRA today.
5. Take strategic advantage of accounts like 401(k)s, Roth IRAs, and 403(b)s where your investments can grow tax-free
Why it’s important: We now all know that holding a diversified portfolio is smart, but, did you know that it matters where you hold those assets? Both taxable (e.g. a brokerage account) and tax-advantaged (e.g. 401(k), Roth IRA) accounts are key components of an optimal retirement strategy. However, some types of investments are better suited to one type of account over others. For instance, investments that pay dividends are best kept in tax-advantaged accounts, so that dividends aren’t taxed before they’re reinvested.
Here's the takeaway: A well-diversified portfolio includes multiple types of assets, which ideally should be strategically allocated across both taxable and non-taxable accounts in order to minimize taxes overall. Consider working with a digital investment advisor, like FutureAdvisor, who will automatically take your account types into consideration when deciding how to allocate 12 asset classes across your portfolio.
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6. Tax-Loss Harvest your portfolio to further reduce your taxes
Why it's important: No one likes to see their portfolio holdings drop in value, but that comes with the territory of investing -- over the short term, it’s going to happen. However, there’s a silver lining to these often temporary drops -- it’s possible to take advantage of dips in the market through a tactic called Tax-Loss Harvesting (TLH).
TLH allows you to sell a losing investment, capture the losses on paper, and purchase a similar
investment so your portfolio remains well-diversified. The losses that you capture via TLH can be used
to offset capital gains elsewhere in your portfolio, or offset your income if you have no gains that year.
To Tax-Loss Harvest effectively, it’s best to watch the market frequently -- even daily -- to identify
opportunities where your positions have dropped in value and can be sold. This can be a cumbersome
process to undertake on your own, and potentially tax-harmful, if not done correctly. But this is
something that can easily be done by a computer. You can read a lot more about TLH here.
Here's the takeaway: Take advantage of TLH, but do it with care. It may be best to work with an automated advisor, like FutureAdvisor, who can track your investments in real time to take advantage of TLH opportunities, and ensure it’s done in a tax-optimal way. The average FutureAdvisor client sees a 0.50%* improvement in annual returns due to TLH.
7. Save 10-20% of your income
Why it's important: How much is the right amount to save for retirement? The answer depends somewhat based on factors like your income, household finances, time to retirement, and current assets. However, broadly speaking, saving more today is doubly beneficial as it reduces the level of income you’re used to living on, and allows you to look forward to a higher income in the future. If you’re under 30, then saving 10% of your income, if you invest it appropriately, should enable you maintain a similar standard of living through your retirement as you experience when you are working. If you start later in life, then you may need to save more.
Here's the takeaway: As a general rule of thumb, save 10%-20% of your pre-tax income. Saving early and often can have a large impact on the size of your portfolio at retirement.
Will you have enough money when you retire?Find Out Now
8. Save into a 401(k) plan to save on taxes
Why it's important: Employer-sponsored retirement plans, like 401(k)s, 403(b)s, and 457s, allow you to contribute funds directly from your paycheck before they’re taxed. There’s a double benefit here in that your overall tax bill is decreased, and that the money is taken out of your paycheck before you even have the chance to miss it.
Here’s what you need to know about 401(k)s in one table:
Here's the takeaway: If you have the option to participate in your employers 401(k), take advantage of it - especially if your employer offers a contribution matching benefit. Matching equates to a guaranteed 100% return on your investment, something that is impossible to find elsewhere. Ideally, tax-advantaged employersponsored plans will comprise just one element of your retirement strategy, with taxable accounts supplementing your savings (and allowing for a mix of accounts to draw down from in retirement).
9. Save into a Roth IRA account to take advantage of tax-free growth
Why it's important: A Roth IRA allows you to pay the taxes on your investment upfront, and pay nothing, including all the growth from it, when you withdrawal at retirement. In addition, if you move into a higher income tax bracket at retirement, which many people do as they increase their earnings over the course of their life, you get the benefit of paying the taxes on the original investment at the income bracket tax rate they were in at that time. Studies indicate that investors typically earn more spendable income from investing through a Roth IRA over a Traditional IRA due to tax bracket changes.
How do a Roth and a Traditional IRA differ?
Not eligible for a Roth IRA due to your income level? First, congratulations on being in a higher
income bracket! Because higher income tends to come with higher tax bills, this means that taking
advantage of other tax-sheltered accounts like a 401(k) or 403(b) is even more important. You may
consider opening a “Backdoor Roth IRA,” something that FutureAdvisor can help you with.
Here's the takeaway: If you’re eligible, invest using a Roth IRA in addition to other tax-advantaged options, like your company 401(k) to keep more of your hard earned cash. If you’re not eligible, consider utilizing a ‘backdoor Roth IRA’
It’s easy to get overwhelmed with the details when it comes to retirement.
By following these 9 Core Tactics, you can stay confident that you’re on the right path, so you can focus on the other things in life that matter.
Need more help? FutureAdvisor’s free service links to your existing investment accounts to combine all your investments in one place. We’ll show you exactly how you’re doing on all 9 of these best practices, and even show you exactly what changes to make so you can get on the right track - across all your accounts.
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment
recommendations or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions
and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past
performance is not indicative of future results. The tax loss harvesting strategy discussed should not be interpreted as
tax advice and it does not represent in any manner that the tax consequences detailed will be obtained or that its tax loss
harvesting strategy will result in any particular tax consequence. Clients should consult with their personal tax advisors
regarding the tax consequences of investing.