Because of a bit of a reshuffle at work with a new employer coming in, I’ve found myself helping a lot of people in their fifties and early sixties set-up a new 401k. Setting up a 401k when you’re 20 is fairly easy – just split the money among large, small, and international stocks, put in as much as you can (15% of your paycheck if you can swing it), and let it ride. When you’re older and closer to retirement, it gets a little more tricky. Here are some things to consider.
You need stability in addition to growth. Even if you’re in your early fifties and can start to see the finish line of your working career, you need to have some growth in your portfolio. This is both because growing your portfolio will add to your retirement security (why work for all of your retirement savings when others can help you grow it?) and because you still have enough time to worry about inflation killing your spending power. This means that you need to have some growth stocks in your portfolio. Still, you’re getting to the point where you may not have time to recover from a major market decline like we saw back in 2008.
Stability comes in the form of bonds, dividend-paying stocks, real estate (typically through REITs) and convertible securities. A rough rule-of-thumb is that you should have a percentage of your portfolio equal to your age minus ten in income securities. For example, if you’re fifty, you might have about 40% of your portfolio in bonds and REITs. Cash is also a great stabilizer, but you don’t want to hold cash assets (bank CDs, money market accounts, etc…) for money that you won’t use for five years or more since inflation is eating away at it all the time. You could have some cash on the side to buy into stock market dips, however, which would help you recover faster when there is a decline.
If you don’t have enough, now is the time to start getting serious. Actually, you’re past the time to get serious. If you’re hitting fifty and you don’t have around $1 M or more in retirement savings or a lavish employer pension, you need to get serious about putting money away. After age fifty you have the option to contribute more to your 401k, so take advantage of the chance. Also, start thinking of ways to find money to invest in general. (You don’t need to invest only in a retirement account such as a 401k – you can invest in a taxable portfolio as well.) It might be time to take less expensive vacations, find ways to make money on the side, or have a spouse go back to work to be able to pile up some savings. You should also consider whether you’ll stay in your house or downsize to a smaller, less expensive home since a home is the main savings many people have.
As you get close to retirement, cash is king. When you are a year or two away from retirement (or even three of four), think about building up a stockpile of cash investments. This will give you some insurance in case the markets decide to go south just as you retire. Often if you can stay fully invested after a crash you’ll see your portfolio recover within a year or two. The trick is having enough saved up to not need to sell things while they’re depressed in price. While there is a chance that your money will double over the next couple of years, there is about an equal chance your investments will decline over such a short period of time.
The more money you have, the more risks you can take. If you need $2 M in investments to fund a comfortable retirement and you have $4 M, you can afford to take more risks with the extra $2 M. As those risks pay off, you can then add to the money you’re using to fund your lifestyle and perhaps improve it. This money can be invested entirely in stocks even if that makes your stock/bond ratio too high. You can also start to give some money away to children and grandchildren from the income the extra investments throw off.
If you’re just barely meeting the minimums, or well below the minimums, you can’t afford to take risks since any major market fluctuation could dramatically change your retirement. You therefore need to invest more conservatively – holding more income investments than stocks and increasing the ratio of income investments to stock investments as you age. You also need to look at ways that you can limit your lifestyle to make the money last as long as possible.
Your investing questions are wanted. Please leave them in a comment.
Follow on Twitter to get news about new articles. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
