Figuring out if you’re actually on track to retire can be one of the most difficult pieces of retirement planning. Even when you’re a well informed investor, you may sometimes question if you’re doing everything you should be to retire on time. It’s a good idea to check in on your investments at least annually to ensure that your portfolio is properly balanced and that you’re saving enough. Here are the steps to take when you want to check if you’re on track:
1. Calculate your goal. This is actually one of the most difficult steps in this process, but you should do it often. In order to know if you’re on track with your retirement savings, you need to begin with a goal in mind. Determine when you want to retire and how much you need to save in order to pay your bills after that date.
[See: 10 Ways to Make Your 401(k) Balance Grow Faster.]
Your retirement savings goal will depend on a variety of factors, including how long you think you will live after retirement, where you plan to live and what your general cost of living will look like. Online retirement calculators are a good place to begin your hunt for that elusive final retirement number. The best calculators factor in lifestyle choices in retirement, such as whether you plan to live a quiet, thrifty life or want to be able to travel, which could drastically change the amount you will need to retire.
The best option is to use several retirement calculators with different inputs and see what they have to say. Chances are they will each produce a different end goal number. But you can use your best judgment to select the calculator that best considers your retirement needs, or take the highest savings goal possible, since it’s better to save too much than to run out of money. If you’re still in doubt about how much you will need to retire, it may be time for a one-time meeting with a financial advisor who can offer some guidance on this point.
2. Set some short-term goals. Once you’ve gotten a number for your retirement end goal, don’t stop there. It’s much easier to see if your portfolio is on track if you break down your savings goals into smaller chunks. It’s one thing to set a goal to save $2 million by age 65. But what does that mean about how much you should have in your portfolio at 35, 45 and 55?
[Read: How to Become a Millionaire by Retirement.]
There are plenty of rules of thumb out there as to how much you should have saved by each stage of your life. But these don’t take your personalized retirement savings goal into account. Instead, look at compound interest calculators like this one from investor.gov. Put your current savings and average rate of return into the calculator, and then play around with different monthly addition amounts. When you can make your end goal within the right number of years, that’s how much you should be aiming to save each month. If you’re not quite at that goal yet, start figuring out ways to save more.
3. Check the performance of your portfolio. Once you can see if you’re on track for your monthly retirement savings, you should figure out if your portfolio is performing as well as it should. There are many ways to check out your portfolio’s overall performance. One option is to use Morningstar’s Portfolio Monitor. With this report, you’ll enter your information into the Morningstar Portfolio Manager. Then, you’ll get a monthly report about your investments. If your portfolio is performing poorly, it may be time to make different investing decisions so that you can get to retirement on time.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
4. Do some rebalancing. Occasionally, you’ll need to rebalance your investment portfolio so that it stays on track. Rebalancing ensures that your investments stay in the proportions that you have in mind. For example, let’s say your goal is to invest 80 percent in stocks and 20 percent in bonds. If your stocks perform well, you’ll eventually wind up with a larger portion of your savings invested in stocks because those investments are growing. Rebalancing will take some of that money out of stocks and put it into bonds. Once you get the hang of it, rebalancing your portfolio is simple. It can be time consuming, but most people only need to do it once a year or so.
Keeping track of your portfolio and your ever-changing retirement goals is important. If you perform these four steps once a year, you’ll be sure to stay on track with your retirement investing.
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4 Steps to See if Your Retirement Portfolio is On Track originally appeared on usnews.com
