Give Your Retirement Plan an Annual Checkup

By Krista McBeath, McBeath Financial Group

Financial professionals typically recommend that you review your employer-sponsored retirement savings plan annually, and when major life changes occur. If you haven’t revisited your plan yet in 2021, the beginning of the year may be an ideal time to do so.

Reexamine Your Risk Tolerance

This past year saw moments that would try even the most resilient investor’s resolve. When you hear media reports about stock market volatility, is your immediate reaction to consider selling some of the stock investments in your plan? If that’s the case, you might begin your annual review by reexamining your risk tolerance.

Risk tolerance refers to how well you can ride out fluctuations in the value of your investments while pursuing your long-term goals. An assessment of your risk tolerance considers, among other factors, your investment time horizon, your accumulation goal, and assets you may have outside of your plan account. Your retirement plan’s educational materials likely include tools to help you evaluate your risk tolerance, typically worksheets that ask a series of questions. After answering the questions, you will likely be assigned a risk tolerance ranking from conservative to aggressive. In addition, suggested asset allocations are often provided for consideration.

Have you experienced any life changes?

Since your last retirement plan review, did you get married or divorced, buy or sell a house, have a baby, or send a child to college? Perhaps you or your spouse changed jobs, received a promotion, or left the workforce entirely. Has someone in your family experienced a change in health? Or maybe you inherited a sum of money that has had a material impact on your net worth. Any of these situations can affect both your current and future financial situation.

In addition, if your marital situation has changed, you may want to review the beneficiary designations in your plan account to make sure they reflect your current wishes. With many employer-sponsored plans, your spouse is automatically your plan beneficiary unless he or she waives that right in writing.

Reassess Your Retirement Income Needs

After you evaluate your risk tolerance and consider any life changes, you may want to take another look at the future. Have your dreams for retirement changed at all? And if so, will those changes affect how much money you will need to live on? Maybe you’ve reconsidered plans to relocate or travel extensively, or now plan to start a business or work part-time during retirement.

All of these factors can affect your retirement income needs, which in turn affects how much you need to save, and how you invest today.

Is your asset allocation still on track?

Once you have assessed your current situation related to your risk tolerance, life changes, and retirement income needs, a good next step is to revisit the asset allocation in your plan. Is your investment mix still appropriate? Should you aim for a higher or lower percentage of aggressive investments, such as stocks? Or maybe your original target is still on track, but your portfolio calls for a little rebalancing.

There are two ways to rebalance your retirement plan portfolio. The quickest way is to sell investments in which you are over-weighted, and invest the proceeds in under-weighted assets until you hit your target. For example, if your target allocation is 75 percent stocks, 20 percent bonds, and 5 percent cash, but your current allocation is 80 percent stocks, 15 percent bonds, and 5 percent cash, then you’d likely sell some stock investments, and invest the proceeds in bonds. Another way to rebalance is to direct new investments into the under-weighted assets until the target is achieved. In the example above, you would direct new money into bond investments until you reach your 75/20/5 target allocation.

Revisit Your Plan Rules and Features

Finally, an annual review is also a good time to take a fresh look at your employer-sponsored plan documents and plan features. For example, if your plan offers a Roth account, and you haven’t investigated its potential benefits, you might consider whether directing a portion of your contributions into it might be a good idea. Also consider how much you’re contributing in relation to plan maximums. Could you add a little more each pay period? If you’re 50 or older, you might also review the rules for catch-up contributions, which allow those approaching retirement to contribute more than younger employees.

Although it’s generally not a good idea to monitor your employer-sponsored retirement plan on a daily, or even monthly, basis, it’s important to take a look at least once a year. With a little annual maintenance, you can help your plan keep working for you.

Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance. Phone 309-808-2224 or email [email protected] for appointment information.

Advisory services are offered through Landmark Wealth Management Inc, dba McBeath Financial Group, an Illinois Registered Investment Advisor firm. Insurance products and services are offered through McBeath Tax and Financial Services, LLC. McBeath Financial Group and McBeath Tax and Financial Services, LLC. are affiliated.