August Newsletter to Clients

Enjoy this month’s edition that features an explanation of portfolio rebalancing, a reminder about Social Security on-line accounts and some 401(k) mistakes to avoid.

A statistic jumped out at me recently and emphasized to me why we rebalance our clients’ portfolios quarterly. If a portfolio was comprised of 60% stock mutual funds and 40% bond mutual funds, that portfolio would have switched over the last five years to 74% stock mutual funds and 26% bond mutual funds if it hadn’t been rebalanced periodically. First, why did the portfolio change that much? Because U.S. stocks gained a lot during the last five years and bonds were relatively flat. Second, what is rebalancing?

Rebalancing is when we review a client’s portfolio against their investment strategy to see if it’s still on target. Each client’s investment strategy is developed to meet their own, specific goals and needs.  For instance, a younger person will probably have a portfolio with more stock mutual funds and a person taking withdrawals from their portfolio for income will probably have more of their funds in bonds. During the regular gyrations of the stock and bond markets, a portfolio will become out of balance with the preferred investment strategy so we may sell some of the funds that have gained and invest those proceeds into funds that need more. In other words, it’s a strategy of selling high and buying low to keep each client on target with their goals.

If you have a Social Security on-line account – and you should – you received an email in the last month notifying you to create a new Login.gov account so you can continue to access your Social Security information. The Login.gov account will replace the old my Social Security account and is designed to simplify our sign-in experiences and align with federal authentication standards. The old option will go away later this year, so we encourage you to create the new account. Steve Byars in our office did it and said it was simple.

A recent study by BlackRock shows that nearly 70 percent of workplace savers now feel they’re on track for retirement – a 12-point jump from last year. A Vanguard study, however, showed a record number of savers withdrew money from their retirement accounts early and the percentage of those taking out loans rose too. With that data as a backdrop, here are three of the costliest stumbles to avoid within your 401(k), according to experts:

Saving too little, too late

Supposedly Albert Einstein coined compound interest as the 8th wonder of the world. There is some dispute whether Einstein actually said that but no dispute of the value of compounding. Take this example: If one saves $500 per month starting at age 25 and earns an average annual return of 7%, the value will be about $1.3 million at age 65. If one waits until age 40 to start that saving? The value is only about $405,000 by age 65. If one waits until age 40 to start, how much do they need to save to have that $1.3 million at age 65? $1,600 per month.

Not contributing enough to receive the full employer match

Most employers match a portion of their employees’ contributions to their workplace retirement plans. The most common match is 50 cents for every employee dollar, up to 6% of income. Nearly half of eligible employees don’t save enough to receive the full match. That’s part of your compensation! Take it! Using our above example and assuming your employer contributes an additional 50%, or $250, per month to your retirement plan. Your account now totals about $1.97 million at age 65 rather than $1.3 million.

Tapping into savings early

The Employment Benefit Research Institute found that from a third to nearly half of 401(k) savers withdraw part or all of their money following a job change. If one gets on the right track at age 25 but then withdraws some of that hard-earned savings along the way, getting back on track requires more savings in the future. Using that first example again, if the 25-year old saves at that $500 per month rate until age 35, they’ll then have about $86,000 saved. If they take out $50,000 of that for a new truck but continue to save at that same $500 per month level, they’ll have about $890,000 at age 65 rather than the original $1.3 million. That $50,000 withdrawal amounts to a mistake of about $300,000.

These are simplified scenarios but good lessons, nevertheless. As always, we’re here for your questions about your specific circumstances.

Ramsey Bova, CFP® Owner and President

Thank you for your continuing confidence.