IRA and 401K investing

Our retirement will be greatly impacted by what we do today with our 401K, IRA's and other retirement investments we have. Yet, we put off dealing with the collection of existing and old 401K's as well as a collection of IRA accounts.

Many of us could do more to maximize the size of our nestegg. An additional 6% return for a decade doubles the size of our retirement money and, probably, doubles the income. If you have an old, neglected 401K, the chances are you could get an additional 6% over the long term.

Fear driven from a lack of knowledge is the enemy. IRA's have too many options and 401K's may not have enough. In either case, not knowing what selections to make results in inaction and the retirement plans linger in the dark. Review your latest 401K statement (or IRA) to see what your three and five year annual rate of return is (ARR). If your ARR is below 3% there is upside for you.



The simplest form of this strategy is to 'buy and hold' (Strategic Asset Allocation or SAA) the assets and only rebalance the asset ratios periodically.

Recently, SAA has been augmented with a more active strategy Tactical Asset Allocation (TAA) which is a 'buy and modify approach. You keep the same asset classes but you may change the ratios depending on market conditions. For example a portfolio with 40% bonds, 30% US stocks and 30% international stocks may see the bond and US stock ratios increased at the cost of the international stocks when international economies are weak.

A five asset class ETF SIB is compared against a leading 401K plan. To make the comparison personal, plug in your own numbers.

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 should you do? First - dig out your old 401K and IRA statements and find out what your annual rates of return are. Second, compare what you are getting with what you could be getting. Thirdly decide what you are going to do about it. Remember, you are talking about your retirement.

Simon Napper is President and Founder of MyPlanIQ.

-Simon Napper