You will often hear that saving is good for you retirement is only half the battle. You must too invest Your savings wisely, so yours money grows over time. After all, a dollar today will not have the same purchasing power in 20, 30 or 40 years, so the money in your 401(k) or IRA should be designed to grow enough to keep up with inflation or, better yet, outperform inflation.
But some older Americans may be taking this concept too dangerously. A recent report by Fidelity shows that 23.2% of baby boomers on a defined contribution plan have too much exposure to risky assets. And that, in turn, could open the door to serious losses from which these savers may never recover.
The problem with aggressive investing in old age
Let’s be clear: Boomers nearing retirement shouldn’t give up theirs shares Completely. But if you’re within a few years of that milestone, don’t invest the majority of your retirement savings in the stock market.
The stock market is known to be extremely volatile. Just take a look at the events of the past nine months. In March, stock values plummeted as the coronavirus outbreak took hold, and while many people’s portfolios have since recovered, there have been several sell-offs since March’s plunge.
There won’t be a pandemic every year (at least we hope not), but the point is that stocks are more likely to fluctuate in value than bonds, and while they’re a reasonable investment for younger savers, older ones should scale back when retirement seam. If you have a lot of stocks in your portfolio and the market crashes just before you retire, your plans to leave the workforce could be dashed.
So what’s a safe stock allocation when you’re older and about to retire? It depends on what your overall income picture is. If you have sources of income outside of your 401(k) or IRA, you may be able to invest your retirement plan more aggressively. But let’s say this account is your only source of income for retirement outside of Social Security.
If that’s the case and you’re nearing retirement in your 60s, a 50/50 stock-bond split in your portfolio may be more appropriate than an allocation that leaves you with a higher proportion of stocks. If your risk tolerance is higher, a 60/40 stock-bond split may also work for you. But having the majority of your portfolio in stocks when you’re only a few years away from retirement could very usefully ruin your plans or expose you to losses if you retire and the market crashes shortly thereafter.
Some older savers could get into trouble just because they don’t know what their asset allocation is. If you’re one of them, do yourself a favor and review your portfolio thoroughly. If you find yourself overinvested in stocks, make some changes soon while the market is still rising.
The last thing you want to do is have your savings bankrupt while you prepare to hand in your resignation. So make sure you have a mix of stocks and bonds that is appropriate for your age.