Is your investment plan ready for retirement? As you progress through life, your goals are likely to change; however, one thing should remain true through your adult life – you want to save enough to retire comfortably. When you’re younger, this may look like putting a percentage of your income away into a 401(k) or an IRA account. However, as you get older, it is wise to take a close look at your investment accounts to make sure they are positioned appropriately for retirement.
Ask yourself, and your financial advisor, these questions to evaluate if your investment plan is ready for retirement.
Is your investment plan ready for retirement? Answer these questions to find out:
How much money will I need to save for retirement?
Calculating how much money you need to save can be complicated. Take these things into account when deciding what your retirement finances will look like:
- At what age do you wish to retire?
- Do you want to maintain your current lifestyle in retirement, or are you looking to make a change?
- Where will you live in retirement? Consider taxes, health-care costs, and cost-of-living of your chosen location.
- Have you considered your housing? Will you buy or rent? Will you be paying a mortgage?
- How much will you and your spouse be collecting in Social Security Benefits?
- Insurance needs for retirement? Consider life insurance and long-term care insurance.
These considerations will help you decide how much income you will need in retirement. Once you know that, you can take a look at your current investments and see if they will be sufficient to provide the funds you need to live the lifestyle you wish to have.
At Prosperity, we provide a comprehensive cash flow analysis to project how much money clients will have through the end of their life (usually age 95 or 100).
What is the right type of investment account for me?
There are various types of investment accounts, and chances are, you already have one or more of these. The two most popular options are 401(k) and IRA accounts.
- 401(k) – This employer-sponsored account gives employees the option to invest with pre- (traditional) or post-tax dollars (Roth). 401(k)s benefit from higher contribution limits.
- Individual Retirement Account (IRA) – You can set up a traditional (pre-tax dollars) or Roth (post-tax dollars) IRA independent of an employer. This is a good option for those who are self-employed. or wish to invest additional resources into their retirement. IRAs can also be used to roll-over 401(k) funds from prior employers.
How much are my fees?
If you don’t know how much fees you’re paying, I encourage you to find out. If you’re not careful, fees can account for a large chunk of your investment account.
There are various types of fees an investment account can incur, and it’s important to understand how much you’re paying, and why.
- Investment management or investment advisory fees – Typically, a percentage of total assets charged by your investment advisor to manage your portfolio. This fee sometimes includes other services, so make sure you understand exactly what you’re paying for and what other services you can use.
- Expense ratio – Typically charged by a mutual fund company as an operating expense. Since it costs the mutual fund money to put together their funds, they charge a percentage. For example, a fund with an expense ratio of .90% will charge $9 for every $1,000 invested.
- Transaction fees – Typically charged in brokerage accounts each time you buy or sell a security. These fees can range from $0 to over $50 per trade and can add up quickly. If you see a lot of transaction fees in your investment accounts, it may be worthwhile to ask why so many trades are happening within your account.
- Annual Account fee or Custodian Fee – Brokerage accounts may charge an annual fee on top of transaction fees. You may also pay an annual custodian fee in IRA accounts.
- Loads – These are sales commissions. There are front-end loads when you put money into certain accounts, and back-end loads when you take money out of certain accounts.
Note that not every financial advisor charges all these fees, so they may not all apply to you. Regardless, you must understand how many fees you’re paying and their purpose in your account.
How are my assets allocated?
Asset allocation in your investment accounts should reflect your investment goals (in this case- retirement), your age, and your risk tolerance. Your assets should be diversified over various asset categories.
Below are some examples:
| Asset Type | Possible Holdings |
| Large-cap stocks | S&P 500 index fund, growth stocks, value stocks, dividend-paying stocks |
| Mid-cap stocks | S&P Midcap 400 index fund |
| Small-cap stocks | S&P Smallcap 600 index fund |
| International stocks | Total world market index funds, Emerging market index funds |
| Alternative Securities | Real estate investment trusts (REITs) |
| Bonds | Bond index fund |
| Cash | Money market account, certificates of deposit, savings |
Over time, we find that people may choose to lower their risk exposure as they get closer to retirement since their account has less time to recover from any market slips. Take a good look at your asset allocation and ask your financial advisor why you hold specific percentages in each of these categories.
Does my financial advisor have my best interest at heart?
Conflicts of interest could arise between you and your financial advisor. For example, as we mentioned in the “fees” section of this article, some advisors charge load fees or transaction fees. Charging these fees isn’t necessarily a conflict of interest; however, if your advisor is purposely moving money between accounts or buying and selling securities to rack up commissions, then you may have a problem.
Adhering to a fiduciary obligation means that your financial advisor acts in your best interest above all else. Some advisors adhere to a suitability standard, meaning they are only required to do what is “suitable” for their clients.
At Prosperity, we adhere to our fiduciary obligation and have an unwavering commitment to do what’s best for our clients. If you’re not sure what standard your advisor adheres to, it’s best to ask. Make sure you fully understand how your financial advisor is getting paid. Ensure that your portfolio’s investments are there because they are the best option for your unique financial situation, not because they make your advisor the most money.
Are you ready for retirement?
Your investment portfolio is a large part of your overall retirement plan. Remember, retirement may last longer than you think. According to the Social Security Administration, about 50% of Americans need two decades or more of income in retirement. You must take the utmost care when evaluating your retirement investment strategy.
Do you think you’re ready for retirement? Take our retirement readiness quiz to find out!
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