A Tax-Savvy Way to Bolster Your Retirement

When you enroll in the program, you're asked to choose a "target date" for your account that corresponds to the year you expect to retire. In addition, you're asked to choose an initial asset allocation and a target asset allocation that you'll reach when you hit your target date.

Between the time you sign up and your target date, the asset allocation will shift. Here's how: SRA uses software that constantly evaluates portfolio positions against your target. Monthly contributions are allocated to the appropriate funds to keep the portfolio aligned with the target. Likewise, if you make withdrawals, positions are chosen to be liquidated that will move the asset allocation toward the targeted portfolio weightings.

As with the target maturity or life-cycle funds available in many retirement plans, the idea is that your asset allocation gets more conservative as you near retirement. "This is similar to that, in that it has that same aspect of that dynamic asset allocation," says Thomas Faust Jr., president and chief investment officer of Eaton Vance.

Faust adds that using cash flows to shift asset allocations is more tax-efficient than rebalancing by selling positions that are overweight in order to add to underweight positions.

Minimizing taxes can have a big impact on your portfolio's returns, particularly when you take into account the impact of compounding.