8 smart investment moves for 2016
Reprinted courtesy of MarketWatch.com.
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We are already well into January, and some conventional wisdom indicates that by now most of us have probably, and conveniently, forgotten or ditched some or all of those new year’s resolutions that seemed so promising and reasonable on New Year’s Day.
With that out of the way, we can get serious and perhaps more realistic about the opportunities before us. Here are eight things worth doing in 2016:
1. Increase the regular contributions to your retirement plan. Assuming you are setting money aside in a 401(k) or similar plan, increase your contribution by one percentage point of your income. (More is better of course, but over a working lifetime, even one percentage point can be very meaningful when you’re ready to retire.)
You’ll probably find this small incremental change fairly easy to live with. Remember that next January, and do it again.
2. If you’ve already maxed out your retirement-plan contributions, increase the amount you’re contributing to your IRA, either Roth or traditional. This year, like last year, you can contribute up to $5,500 if you’re under 50 years old and up to $6,500 if you’re 50 or over. (However, your contributions cannot exceed your earned income.)
Just as with bumping up retirement-plan contributions, regularly adding more to your IRA can have a big payoff down the line.
3. If you’re already pushing against your retirement plan and IRA limits (and if you’re married), consider increasing the contributions to your spouse’s retirement plan or IRA. If your spouse doesn’t have earned income, he or she is still eligible to contribute to an IRA.
4. Within your retirement plan and your IRA, look for funds with lower expenses than the ones you have now. This doesn’t mean changing asset classes (that may be worth doing, but it’s a different discussion). It means finding a fund in the same asset class that will cost you less money to own.
Many retirement plans will let participants use a brokerage account to choose among thousands of funds, including low-cost index funds. Even if you have to pay a small fee to make do that, the results — better investment choices and lower costs — can be well worth it.
5. If your retirement plan — 401(k) or similar — options are mostly ones with active management and higher-than-optimal expenses, consider saving instead in an IRA, where you’ll have an almost unlimited array of choices.
This will give you access to low-cost index funds and all the most desirable asset classes.
Before you even consider this, make sure that you are putting enough into your retirement plan to take full advantage of any employer match for which you are eligible.
But once you’ve captured the match (if you’re lucky enough to have one), you may have many better options in an IRA.
Reducing your retirement-plan contributions may result in a higher tax withholding. But that can be offset by the tax deduction that comes from contributing to a traditional IRA.
6. Many investors over the years accumulate a number of investment accounts, some of which seem too small to worry about. If you’re in that boat, you have a couple of worthwhile options.
One, you can consolidate those accounts to cut down on paperwork and make your life simpler. You may find that the resulting account is large enough that it’s worthwhile to make sure it’s allocated to complement the rest of your portfolio.
Two, you can keep the small accounts but move the money into an asset class that may do something special for you. If you’re the conservative type, you could move into bond funds. If you’d like the potential for higher returns (remember, we’re talking about accounts so small that they haven’t made you anxious), you could move into an asset class like small-cap value stocks.
Before you do this, be careful of tax consequences from selling. This shouldn’t be a problem inside an IRA, or when consolidating existing IRA accounts.
However, in taxable accounts, any asset sale may trigger a capital gain or loss. Sometimes the benefits of improving your asset allocation may be worth incurring a tax liability. But this is a tricky area, so be sure you understand what you’re getting into.
7. Married or single, employed or not, it’s always smart to make sure that your investment portfolio is geared toward your own needs. Here are two ways to give yourself an annual checkup.
If you’re saving toward retirement, go through the exercise I call “12 numbers to change your life.” You’ll find the directions here.
No matter what your age or circumstances, if you’re an investor you are inevitably exposing your assets to some level of risk. Controlling the amount of that risk is one of the most important tasks you have to tackle. Where the rubber meets the road is the division of your portfolio into equities and bonds, as I outlined in a column last year.
8. If you own a target-date retirement fund, sell 20% to 25% of it and reinvest the proceeds in a small-cap-value fund. This could double your potential long-term without making you give up the many benefits of the target-date fund. (How’s that for a New Year’s gift to yourself!) Read more about this here.
Richard Buck contributed to this article.