IRA and 401K Retirement investment strategy

By: Simon Napper

Our retirement accounts may lie around like unread magazines - something we will get to later but not now. A collection of IRAs and 401K (403B etc) plans are waiting for attention to ensure that the right funds and strategies are being applied. This is what will see us through our retirement and yet we put off dealing with them.

More can be done to increase our retirement nestegg. An additional 6% return doubles the size of that nestegg in a decade. If you have neglected retirement plans, it's likely that you can get more out of them and build your retirement payout.

Too many or too few choices can paralyze because we don't know what to do and we fear making a mistake that will lose money. IRA's have a limitless set of alternatives and the 401K plans may not have the choices you would like to make. If you look at your latest 401K statement (or old IRA for that matter) and see what your three and five year annual rate of return is (ARR). If your ARR is below 3%, read on, there is upside for you.

SIB (Simpler Is Better) - market index funds from key asset classes that can be used to measure historical returns - are going to be used to evaluate the upside potential and determine whether it's worth taking any action.

The SAA (Strategic Asset Allocation) --buy and hold strategy represents what many people may end up with as there is little thought put into which asset classes are represented but these are the most likely ones to be covered.

Over the past decade 'buy and modify' (Tactical Asset Allocation or TAA) evolved whereby you keep the same asset classes but you may change the ratios depending on market conditions. For example a 60% bonds, 20% US stocks and 20% international stocks portfolio may see the bond and US stock ratios increased at the cost of the international stocks when international economies are faltering.

We compare the results of a 5 asset class SIB portfolio with low cost ETF funds against a leading 401K plan. You can plug in your own numbers for your own 401K or IRA.

A five asset class SIB implemented with Vanguard ETF's with a moderate risk profile has delivered 5 year annual historical returns of 8% for strategic asset allocation and 14% for tactical asset allocation. Contrast this with the IBM retirement plan of 5% and 11% for the same strategies over the same period. Be aware that these are comparisons of like strategies. So, if you were using buy and hold (strategic asset allocation) with the IBM plan, you would be in the 5% range and if you wanted to use tactical asset allocation with and IRA you would be in the 14% range - that is a big difference.

What to do? Find your latest 401K and IRA statements and see your annual rates of return - some sites will calculate that for you. Then compare what you are getting with what's possible. Finally decide what you are going to do about it. Remember, you are talking about your retirement.

Article Source: http://yourfinance.co.za

About The Author
This allows retirement plan participants (IRA, 401K etc.) to automatically build and manage portfolios that professional wealth managers use -- but for free or at a fraction of the cost. The result will be improved returns and lower risk.