Make sure you have designated a beneficiary for your retirement plan. This usually happens at enrollment. A problem occurs when your relationship with that beneficiary has changed or there is someone else you would prefer to leave those funds to in the event of your death. Make sure and review the beneficiary arrangements on all of your accounts.

If your child has investment income of more than $1,800 they could be taxed at your, the parent’s, rate instead of their, the child’s, rate. This applies if the child meets one of the following three requirements:

1.     The child is younger than 18.

2.     The child is 18 and has earned income that does not exceed ½ of their own support for the year.

3.     The child is older than 18 and younger than 24 and a full-time student with earned income that does not exceed ½ of the child’s support for the year.

Investment income includes interest, dividends, capital gains and other unearned income.  There is more information on this topic in IRS Publication 929.

Preparing for retirement is not a one shot deal. It is an on-going process. The decisions you make today are only the starting point regardless of your age. As time moves forward, you must monitor and rebalance your retirement account.

A good starting point is the Rule of 100. Subtract your age from 100. That will give you the maximum percentage that should be invested in equities. Example:

Age 30 100 – 30 = 70

That means that no more than 70% of your assets should be in equities. So you would start with 70% in stocks and 30% in bonds or fixed assets.

What does it mean to Stay in Balance? This means to make sure that the mix of equities to bonds and fixed remains the same. This will help reduce the risk that you are taking and potentially increase your returns. Example:

We start with our 70% Stocks and 30% Bond mix. The market has a good run and we realize we are now at a 80% Stock and 20% Bond mix. You should sell some of the equities in your portfolio and buy bonds. I would use a 5% rule. When you are 5% out of balance make a change. This takes discipline.

We can control our risk through diversifying our portfolio. There are sub categories within Stocks and Bonds. Domestic, Large Cap, International, Government, Junk etc are all categories that each carry their own risk and rewards. The higher the risk the higher the higher the POTENTIAL reward. Risk does not carry a guarantee of a reward. You have to be aware of the potential for losses. Look at your choices and see what are their best 5 and worst 5 years. How would you feel if the worst 5 happened to you?

There are going to be a couple of reasons that your account will be out of balance. The two most important reasons are:
1. Investment Performance 2. Risk Tolerance
Let’s look at each of these in one example of overall out of balance.

You should have your assets invested in different asset classes. Each asset class will perform differently at different times. As we said earlier, if you have gains in one side of your portfolio vs. the other or if you have gains or losses between asset classes you should adjust. I use a rule of 5%. Here are some examples:
Starting Balances:
Year Account   Account Balance  % of Portfolio
0      Stocks        $7,000                  70%
        Bonds        $3,000                   30%

2     Stocks        $8,000                  69.57%
       Bonds        $3,500                  30.43% 

We should rebalance assuming we return to the Rule of 100. Age 32 now subtracted from 100 gives us a value of 68%. After rebalancing we should look as follows:
Year Account   Account Balance  % of Portfolio
2       Stocks         $7,820               68%
         Bonds          $3,680              32%

 We can also be out of balance within our accounts. Here is an example:
Year Account/Sub-Account  Tot Acct Bal/Sub Acct Bal  % of Portfolio
0         Stocks                        $7,000                                     70%
                     Large Cap                  $4,000(57.14%)
                     Mid Cap                      $3,000(42.86%)
                     Small Cap                   $1,000(14.29%)
           Bonds                         $3,000                                    30%

2        Stocks                         $10,200                                   68%
                    Large Cap                   $4,575(44.85%)
                    Mid Cap    $2,700(26.47%)
                    Small Cap    $2,925(28.68%)
          Bonds                         $4,800                                     32%

While overall we are in balance, we have some internal balance problems. We should sell some of our Small Cap equities and buy some Large and Mid Cap equities. We could also add funds to those accounts to bring the portfolio into balance. I suggest rebalancing at least annually but no more than quarterly except in cases of extreme volatility.