Are you making the most of your IRA? Individual retirement accounts are a common way to invest for retirement, but many investors are making two surprisingly common mistakes that can really hurt their ability to fund a comfortable life in retirement.
Mistake #1: Forgetting to contribute to your IRA
Nearly all working people need to make regular contributions to a retirement account in order to accumulate enough money to live on in retirement. But many people don’t contribute to IRAs. “Although IRAs can help Americans build their retirement savings, the majority of U.S. households do not contribute to them,” the ICI reported in February 2016.
Some investors simply aren’t eligible to contribute, so your first step should be to check the IRS Web site to make sure you can contribute.
Then, if you can contribute, decide how often you’ll add to your IRA--will you make one annual deposit or will you contribute a little every month? Then schedule a reminder so you’ll stay on track. If you’re making one deposit a year, put it on your calendar or schedule an alert on your phone so you’ll remember to make your contribution every year. If you’re making monthly contributions, consider setting up an automatic transfer from your checking account into your retirement account.
To make sure you’ll follow through, write down how you plan to contribute to your retirement account. Studies find that investors who have a written plan are much more confident that they can reach their goals.
Even relatively modest contributions add up over time, especially if you invest your contributions.
Mistake #2: Leaving your IRA contributions in cash
Many people make their IRA contributions early in the year when they’re doing their taxes, but then they forget to invest their contributions. A Vanguard study found that more than two-thirds of IRA contributions made in January through April was still in cash four months later.
The market goes up more often than it goes down, so even though we can’t know if we’ll be better off this year to invest our money earlier rather than later, on average we are better off getting our long-term money invested sooner than later. The sooner we invest our IRA contributions, the more time our investments will have to grow. So if you made a contribution to your IRA this year, do yourself a favor and get it invested.
Funds to own in your IRA now
Vanguard found that while investors “know they need to make the contribution, they haven’t necessarily made their investment choice," and that’s understandable. With more than 25,000 funds and ETFs available, it can be challenging to know which funds to own now and when to move into other funds. But a clear investment strategy can help.
My strategy, which I share with readers of NoLoad FundX newsletter, leads me to invest in funds with strong recent returns because funds that have done well recently tend to continue to do well over the next year.
Here are a few funds and exchange-traded funds that might be a good fit in your IRA this month:
Stock funds have been the best way to grow your portfolio long term, and I believe most investors should focus on diversified funds that have market-level risk like SPDR S&P Dividend (SDY) or PowerShares S&P 500 Low Volatility (SPLV). These two ETFs have good recent performance: both handily beat the market in the volatile first quarter of 2016 and over the trailing year SDY was up 9.3% and SPLV gained 5.2% for the quarter, while S&P 500 was up just 1.3%. Plus, these ETFs also have solid liquidity and trade well.
(If you’re new to ETFs or you know that you aren’t going to spend all day waiting for an optimal time to trade, place a “market on close” order. This means your trade will be placed at the end of the day’s price when ETFs tend to trade in line with their underlying indexes.)
Balanced funds are another great option for retirement investors who want to take less risk, but still have some growth potential. Balanced funds invest in stocks for growth and they own bonds to help cushion volatility. Two balanced funds that have done well recently are Mairs & Powers Balanced (MAPOX) and Vanguard Wellesley Income (VWINX). MAPOX was up 4.2% and VWINX gained 3.8% in the first three months of 2016.
Remember that markets will change over time, and a fund that’s doing well now will eventually fall out of favor, so make sure you monitor your investments on a regular basis and adapt as markets change.
