It is the perfect time to do your 401(k) checkup because you should be receiving annual statements and tax documents for your IRA and retirement plans. Please don’t just shove them in the envelope for the tax person.
Instead, give those babies a real checkup!
This article discusses why you want to know:
- What accounts you own and where they are located.
- How they are invested.
- Who the beneficiary is of these accounts.
I will not be discussing only IRAs specifically, but I will also include all sorts of retirement plans. Today, I will just use the term retirement plan.
Step #1: Find out what you have and where it is located.
Let me share a story about why this is so important!
Earlier this week, I received an email from one of our Smart Women members who said she just found an extra $13,000. You see, years ago, her husband had rolled over his 403(b) retirement account (this is the one for teachers), and they had no idea that it wasn’t moved to the new custodian.
To her, it seemed like new money, but in fact, it was just lost for a while. I’ve actually helped clients find accounts that they had lost track of. You don’t want to ever have to do this, so let’s fix this once and for all.
Imagine all the jobs you have had over the years. Did you leave your 401(k) with your former employer? Do you have IRAs all over the place? Do you have Roth IRAs? What about that little $2,000 IRA you opened when you first got married? You get the picture. Once you have them all identified, you will have some options on how to simplify your bookkeeping, maximize your return and to minimize your risk.
The secret here is to create a list of every retirement account you have on one sheet, so you know what you have and what it is worth. This will make it easy to track your total account performance, since they will be all in one place.
Do I have your attention! Let’s talk about investment performance now.
Step #2: Know how your money is invested.
I believe most people don’t really understand what they own and what that means to risk. Let me give you an example:
In the fall of 2019, I was having breakfast with a very successful client, and we began to talk about retirement. I asked her if she had reduced her risk in her portfolio since she was just a few years from retirement?
Her response was, “I’m all set. I’ve got an IRA.
I said, “An IRA is a tax code. It has nothing to do with how you are invested.”
Then she said, “I’m diversified. I’m in mutual funds.”
Mutual funds could be all stock, all bonds, cash or even gold. I suggested she meet with her financial advisor to review her “Asset Allocation” to see how much she has in stocks, bonds, and cash to see if she should do any re-balancing and to reduce her risk since she was so close to retirement.
Without the proper asset allocation, your portfolio could be either too risky or too conservative. The natural tendency when the market drops is to sell, but in reality, this is the time to buy because everything is on sale.
We all remember what happened in March 2020 when we saw one of the most dramatic stock market crashes in history when the DOW plunged 6400 point or around 26% in just 4 days!
Were you prepared for that? Most were not. Why?
One person I know who was close to retirement, sold everything, over one million dollars, in March 2020. He sold when the market was down about 25%, losing hundreds of thousands of dollars.
He is devastated right now because the market not only recovered, but it is up about 57%. So instead of having $1.3 million for retirement, he now has about 1/2 or $750,000.
When the market goes down, the natural tendency is to want to GET OUT. In most cases, our timing is terrible when we react to emotion. Besides, when you sell, you better have a plan as to when to go back in.
This problem is amplified when you have multiple accounts and money managers because no one is looking at the big picture for you.
What is the solution? Part of this check up will be to determine whether it makes sense to consolidate some or all accounts so you can manage them more effectively.
If you have multiple IRAs and retirement accounts, find out if you can consolidate them, and while you are at it, you can analyze and rebalance your asset allocation.
Now last, but certainly not least, I want to talk to you about your beneficiary designations on those retirement accounts.
Step #3: Identify who will receive the money if you were to die?
I have one more story for you.
About a decade ago, I invested part of my IRA into a privately held stock. This type of an IRA needs to be help by a special IRA custodian. One year, my IRA was moved to a new custodian, and I assumed that everything was fine.
One day I was updating my estate plan, and I wanted to update my beneficiary designation. To my dismay, they didn’t have any information on my beneficiary designation. In addition, they did not even have a copy of my stock certificate. It was gone.
To make a long story short, they were able to locate my original stock certificate, and I completed the new beneficiary form, so problem solved.
What could have happened if I had died unexpectedly?
Here is an actual story:
My friend’s father had a huge IRA. He died without a beneficiary designation, so his IRA went to his estate. A beneficiary designation avoids probate and allows you to leave your IRA to a person, who in most cases can maintain the tax deferred status allowing it to continue to grow or to be paid out over a series of years.
Instead, the whole IRA went through probate and after all the legal fees and taxes, the money was reduced about 40%. In addition, instead of receiving a retirement account, each child received a check to them outright which ended up right in their bank account.
What do you think happened to that money? Well, it got piddled away by all of them.
Why should you check your beneficiary designations? Because so many banks and financial institutions have consolidated or been bought out. Remember, that is what happened to me. My paperwork was perfect. It just never got transferred to the new custodian.
I hope I have your attention now!
Let’s review what is involved with this retirement check up:
Step #1: Do an inventory to find out what you own and where it is located.
Step #2: Do an asset allocation on your entire portfolio to identify how much risk you are taking, how your investment overall is performing, and as you are getting closer to retirement, begin to reduce your risk.
Step #3: Check with each custodian for each of your accounts to confirm what they have on file for your beneficiary. Then review it to make sure it is still correct. If not update it. My friend’s husband was a smart CPA, who did not update his beneficiary and died unexpected when his wife was pregnant with twins. Guess who got that money? His ex-wife.
Let’s get smart about money and schedule time for your financial check up today! If you want help with this process, you are welcome to visit me at www.talkwithkatana.com. While you are there you are welcome to pick up my free guide: Three Strategies to MAXIMIZE Your Retirement Income.