Don't Chase Returns with Your Retirement Account

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Those who wish to once they retire and live off of the savings they accumulated over their lifetimes have many different considerations to keep in mind.

Factors such as how long they will live, their standards of living in retirement and where they will live, all come into play. But, perhaps surprisingly, the final amount you have in your retirement account the day you stop working is largely a factor of just three components: the amount of money you save, the amount of time it earns interest and the amount of interest it earns during that time.

Though you can control the first two factors, the third factor is completely out of your control. Despite this realization, many people try to determine the returns their retirement accounts will experience, a practice which is generally not recommended.

When saving for retirement, particularly when investing in a 401(k), you will have to make decisions as to the amount of risk you wish to expose your retirement savings to.

Most people choose to allocate their retirement savings among different classes of risk, typically putting a portion of the savings in higher risk, higher return investments, while shielding part of the retirement savings by investing in lower risk, lower return scenarios.

In today's market lower risk scenarios may return as little as one to two percent interest per year, while higher risk scenarios may yield as much as 30 percent per year or more.

Many people look at the difference between these scenarios and wish to change their savings allocations, to essentially chase the higher returns which can be had in riskier investment classes. But this not recommended.

Retirement experts overwhelmingly recommend that future retirees make a retirement plan and stick to it, and avoid frequently reallocating their funds in an attempt to increase yields or decrease losses.

Reallocating your retirement account frequently in an attempt to maximize yields may not only cause you to lose your way as it relates to retirement savings, but it can also cause you to unwittingly expose your savings to much higher risks than otherwise necessary.

For example, those changed their retirement strategies in order to avoid risk during the 2008-2009 stock market crash likely lost more money than they would have lost had they stuck to their original plans.

In fact, many of those future retirees, some of whom lost more than 50 percent of the value of their retirement funds, would have actually earned money in the long run if they had stuck to their original plans and seen the downturn through.

It is definitely a good idea to realign your retirement funds every so often, in order to take into account your changing financial situation and risk appetite.

But, chasing returns in the stock market amounts to a fool’s errand: trying to "time the markets."

It is likely that more people have lost money in investments due to this practice than for any other reason. Trying to time the markets means you essentially have to be right twice: when you purchase the investment and when you sell it.

Instead of trying to time the markets, stick with your original investment plan and sleep well knowing that you don’t have to reinvent the retirement planning wheel.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Retirement , Economy , Travel and Lifestyle

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