Proactive Investor

Retirement Funds and Rate of Return

Russ Allen

If you are like most people, the savings earmarked for your retirement may be scattered among several different places. Today we’ll look at a few of those possibilities and discuss some alternatives.

The point of this discussion is to help you to see the entirety of your retirement asset base as a whole, but one with multiple components; and to think about ways to maximize the overall rate of return.Tweet: think about ways to maximize the overall rate of return.

Don't just hope you'll have enough retirement, take steps to ensure you will.The first thing to do is to categorize those retirement assets that you currently own. These may fall into several categories:

  • Assets held in your own name or jointly with a spouse
    • Free Trading WorkshopBank accounts
    • Brokerage accounts (containing stocks, bonds, mutual funds and/or ETFs)
    • Mutual funds
    • Hedge fund accounts
    • Real estate (other than your home(s))
    • Precious metals, gemstones, collectibles
    • Partnership interests, stock in privately held companies, venture capital investments
    • Annuities, whole life insurance policies
    • Vested rights to old-style defined benefit pension plans (not many of these left!)
  • Assets held in a current employer’s retirement plan
    • 401(k) for many corporate employees
    • 403(b) for teachers and some others
    • 457(b) for many government employees and some employees of non-profits
    • Other retirement account sponsored by a current employer
  • Assets in plans like the above sponsored by former (not current) employer
  • Assets held in a tax-advantaged retirement account for you as an individual, which may have a bank, a brokerage, or another type of company as custodian. All of the following types of accounts are most often invested in mutual funds, although there are other possibilities.
    • Traditional IRA
    • Roth IRA
    • SEP-IRA
    • Solo 401(k)

Making a complete inventory of the assets you have to work with is a necessary first step. For each one of these assets, you’ll need to know its current market value and an estimate of its rate of return. If you work with a financial adviser, they should be able to help with that. If not (and if not, congratulations on your initiative to manage your financial affairs personally!) this is homework that you’ll need to do. For rate of return estimates, look at previous years’ statements, going back as far as you can to get a picture of the rate of return in differing market conditions. One warning: for stocks and mutual funds, the last seven years have been a roaring bull market, a period of atypically high returns that we would not expect to be the norm going forward.

With this information listed on one page, you can now see the whole and its component parts.

The next step is to decide what needs to be changed, if anything. The goal is to have an asset base that provides an adequate return, while being properly protected against a bad market in any one area such as the stock market.

One example of what you would not want to see, unfortunately, is the situation that many people find themselves in. That is having all of your assets in a current or former employer’s 401(k), where it is invested in a couple of stock-based mutual funds. These funds (and all stock-based mutual funds, whatever their orientation) could be decimated by a stock market crash. And the nature of stock markets is to have bull markets alternating with crashes. So the next crash is always only a matter of time.

For that reason, we want to make sure that it is never the case that all of our retirement money is in stocks (or mutual funds and/or variable annuities, which also are entirely dependent on stocks). What we need is true diversification across entirely different asset classes, as well as a system of management that protects what we do have.

The process of selecting and managing your investments is entirely within your capabilities once you are educated on the subject. We’ll talk about more of the highlights in the future. Meanwhile, making the inventory and determining your starting point is one of the necessary first steps.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.