We all want to do what's best for our financial future, but sometimes it can be a struggle to figure out whether or not we're making the right decisions. Especially when finance and investing aren't the easiest or most enjoyable subjects to understand, it can be tempting to push it aside until later so you don't think about it.
However, simple mistakes that you don't even realize you're most likely making could potentially wreck your retirement. And there's one mistake in particular that close to half of older workers are making.
Ask Yourself These 3 Strategies Are Important To You
1. Never again lose retirement money to a market downturn
2. Stop taxes from eating up your retirement when you pull it out
3. Create a retirement income you can’t outlive
Don't put all your eggs in one retirement basket
You've likely heard that before! - you shouldn't put all your eggs in one basket, and the same concept is true when it comes to retirement planning. When you're stashing money in your retirement account, you'll want to spread your money across various investments to limit your risk while still reaping the rewards. This is the main principle of what we call asset allocation. Asset allocation is very important on choosing the right product at the right time.
There's no one right way to invest your money, and it varies from person to person, but it's a good idea to build a balanced portfolio filled with higher-risk, higher-reward investments like stocks as well as low/no risk, sometimes lower-reward, SAFE investments like annuities or life insurance contracts. Some of these products can give you lifetime income and tax-free income.
If you play it safe and only invest in funds that carry less/no risk, you likely won't see the types of returns you need in order to build a robust retirement fund. It also depends on how close you are to retirement. But on the other hand, if you're too aggressive with your investments, you run the risk of watching your savings crumble if the stock market takes a hit – we all remember market crashes in 2000 and 2008, right?
According to Fidelity Investments, new research reveals that many older Americans might unintentionally be putting themselves in that situation. Approximately 39% of baby boomers are currently investing too heavily in stocks. When you're younger, you can invest more heavily in stocks and other higher-risk investments, because if your savings take a downturn during a recession, you still have plenty of time left for your retirement funds to recover. On the flip-side, if you're just a few short years from retirement and your savings take a hit, you might be in trouble and fall short of income to retire.
It's essential to adjust your investments as you get older because the asset allocation strategy that worked when you were 28 years old won't be the best option when you're 60. If you're close to retirement age and you're still relying too much on stocks, your savings could be at risk.
What does a balanced retirement portfolio look like?
How much you should rely on stocks versus bonds depends on your age, the age at which you plan to retire, and your personal comfort with risk. The older you are and the closer you get to retirement, the more you should lean on lower-risk investments. Although your savings won't grow as quickly, they will be more protected in the event of a market downturn.
That doesn't mean you shouldn't invest in stocks at all, though, even as you get older. Putting at least a portion of your retirement investments toward stocks can help you earn higher rates of return while still limiting your risk. Fidelity recommends 90% of the average 28-year-old's retirement portfolio should be invested in stocks. Then that percentage should slowly decrease to around 20% once a worker is a decade or two into retirement.
If the thought of allocating all your investments yourself sounds overwhelming, there's good news: There's a super simple (and much less stressful) way to do it, and it involves finding a qualified and experienced financial planner.
Stashing money in your retirement account year after year is only half the battle; you also need to know how your money is being invested to make sure you're not being too risky (or too safe) with your savings. By understanding how heavily you should rely on stocks and adjusting your retirement portfolio accordingly, you can make sure you're protecting your savings as much as possible.
Please give us a call to see how we can help you balance you portfolio to make sure you have protected income and future income.