Retirement planning has common benefits and challenges. The tax advantages and array of options gives investors flexibility. Those who start early, use the power of compounding and maximize contributions can approach retirement with financial security.
However, increases in life expectancy and cost of living make it essential that IRAs or 401ks are managed wisely. Most of this focus tends to be on investment returns. The current bull market has rewarded many equity investors. Equity rallies can cause us to chase performance or overlook the cost of investing.
As a result, many investor portfolios may no longer reflect time horizon or risk tolerance. Stock run ups also make us more forgiving of investment costs. These oversights can create subtle risks and affect total return when stock markets correct.
Thankfully, there are options to cut investment costs and boost your IRA or 401k for various market conditions. Here are some strategies to consider:
Boost Your IRA or 401k – Start with Index Funds:
Rock bottom expenses and diversification give index funds broad appeal. Index funds make maintenance easier, as well. Periodic rebalancing brings portfolios back in line with the broader index. This turnover can lead to tax inefficiency, which is of less concern to retirement investors.
Index Fund Strategies:
Investors can use index funds to access asset classes or markets that are otherwise difficult. This includes REIT index funds for real estate exposure.
Real estate markets often move separately from stocks, which adds negative correlation to reduce risk. You can capitalize on demographic trends, as well. Buying Healthcare REITs that invest in senior centers or hospitals is an example. Meanwhile, foreign REITs give access to overseas property markets.
REITs are required by the IRS to pay out 90% of taxable income to shareholders. Retirement investors can use REITs to diversify without the tax concerns facing regular accounts.
International index funds make it easy to diversify your country and currency exposure. Emerging markets in particular, tend to move in different directions from the U.S. indices. A weak dollar can increase your dollar adjusted returns in foreign index funds.
ADRs (American Depositary Receipts):
Buying foreign stocks involves converting currencies, duty costs and higher overall expenses. This is reflected in the relatively high expense ratios of international mutual funds.
American Depositary Receipts ADRs are a convenient and affordable way to buy foreign stocks. So, what are ADRs? ADRs represent ownership of shares in international equities. The securities trade on American exchanges and are denominated in dollars. Despite being priced in dollars, the company’s home currency will still affect performance. (Foreign exchange risk)
ADR Strategies: A weak American dollar may boost your dollar adjusted returns. Reinvested dividends into your 401k are also boosted when converting to weaker dollars. Of course, the opposite is true in cases of a strong dollar, but the added currency exposure may lower overall risk.
Direct Stock Purchase Plans (DSPP):
Various online tools and platforms have made it easier to manage your own retirement accounts. However, brokerage commissions and fees can cut into your returns.
With a DSPP, you buy shares directly from the company, often with no minimum purchase. Most DSPPs are brand name equities, which make it easier to track and research the stocks.
DSPP Strategies: DSPPs make it cost efficient to take focused positions with minimal cost. You can create a diversified portfolio across sectors and market caps with contribution limits. Investors with small budgets may also use Direct Stock Purchase Plans to get started.
Cutting Costs and Boosting Returns:
Costs are a single but important aspect of making investment choices. Beyond custodial or brokerage fees, investment costs can boost your IRA or 401k and have a large impact on total returns. You can improve your IRA’s performance with cost efficient and quality options.
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