Monitoring your Retirement Assets
Recently I had lunch with a close friend. During our meeting we discussed my blog site and some of the things I talk about. At the end of our lunch I sensed my friend’s attitude regarding managing retirement assets was similar to the attitude I notice with many other people my age (i.e., over 50 years old). These people try to save as much money as they can, but don’t seem to have the time to monitor their retirement assets. This attitude of “being too busy” to monitor your investments can be very costly to your retirement.
This blog site is about simplifying retirement planning. I have tried to lay out the ideas, concepts, and approaches that I think are important to retirement planning while giving some guidance on things you should not worry about. But people often indicate to me that they don’t have time to spend on their investments. I think some perspective is needed.
Everyone is familiar with the process of employing a new software product you have bought to assist you with a particular task. It requires a certain amount of time invested up front such as learning the product features, adding some data to the software product, etc. Getting through this initial phase can be a real pain, but, after you have done so, the software usually pays off by saving you a lot of time or somehow making your life easier.
Proper retirement planning is much the same in the sense that it does require you to invest some time up front developing a basic retirement plan, determining your savings rate, setting up retirement accounts, deciding on your equity allocation, reading about and selecting the appropriate mutual funds, deciding what percentage to invest in each fund, etc. But once this initial work has been done, you should not have to spend a lot of time on your investments. But you do have to periodically review your investments. I don’t mean review your retirement accounts to see if they have increased or decreased in value. I mean perform a periodic review to re-affirm your equity allocation and that your specific investments are appropriate for your financial goals. I spend about one hour quarterly reviewing my investments unless something unusual happens such as a management change at one of my investment funds (I do spent a lot of time reading investment newsletters and keeping up with the markets, but this is a personal interest for me and it is not necessary to be a successful investor). If you are younger, probably a review of once per year may be enough.
Back to my friend and our lunch meeting, during our discussion I could tell he rarely reviewed his retirement accounts as he was not sure what his equity allocation was. He indicated that he just did not have time to spend managing his retirement assets. Obviously, to make a statement like that, he must think it takes a lot more time than it actually does. In my friend’s case “being too busy” to review his investments turned out to be very costly.
He told me during the 2008-2009 financial crisis he only made a couple changes to his investments, but he kept adding money every month to his retirement accounts. When I asked him if his retirement accounts were up or down from before the financial crisis in 2008, he said they were down about 20%.
When I probed him more about this large drop, one thing he said was, after the markets had crashed, he reviewed his largest mutual fund to find out why it had dropped so much in value. It turned out his largest fund, a “growth & income” fund, had an equity allocation over 90%, instead of the usual 50% to 60% equity allocation. Even if he had been properly managing his equity allocation, this oversight would have caused his overall equity allocation to be off by as much as 20%. After hearing this, I suspect one of the “couple changes” my friend made during the crisis was to sell some or all of this fund near the bottom. That is the only way his portfolio could still be down 20%. In any event, he could have easily avoided this nasty surprise if he had just reviewed the fund’s prospectus when he first contemplated investing in it. In addition to not having any investment discipline, my friend’s situation illustrates how not knowing the makeup of your investments can cost you a lot of money.
How would my friend’s results have been different if he spent just 10 hours per year reviewing his retirement investments? What if employed only two concepts I have discussed on this blog; monitoring his equity allocation and periodically re-balancing his retirement assets? He would have been significantly better off.
Let’s look at what could have been for my friend. Assuming he is on track with his retirement asset accumulation based on the table I provided in Blog Post #9 , he should have accumulated somewhere in the neighborhood of $600,000 to $700,000. Let’s assume he has $600,000 now which is 20% lower than the $750,000 he had before his 20% loss due to the financial crisis. If my friend had examined his investment funds in detail and performed periodic re-balancing of his assets throughout the recent financial crisis, not only would he not be down 20% from before the financial crisis, he could have been up 20% based on the results I experienced as detailed in Post #16.
That is a huge difference. Instead of his retirement accounts being reduced by 20% (from $750,000 to $600,000), they could have been as high as $900,000. That is a difference of $300,000. I did not ask my friend this question, but I will ask it of the readers of this blog. Would 30 hours over the last 3 years be worth having your retirement accounts worth $300,000 more? That works out to $10,000 per hour. Even if my friend had not made any investment changes the last 3 years and had done the proper reviews of his investment funds to avoid any surprises, he would likely be at the same $750,000 retirement asset level of 3 years ago instead of $150,000 lower. Granted he has lost 3 years of time, but he would still have been a lot better off. Avoiding this $150,000 reduction in his portfolio value represents $5,000 an hour compensation on the 30 hours of time invested.
$5,000 per hour is a much higher rate of pay than most people earn at their jobs. If you have built up a large retirement nest egg, some perspective is needed on whether you should find the time to properly monitor your retirement assets. Personally, I think it is worth the effort.
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