Investing wisely is important at any age, but especially during your later years.
When you're a retiree, chances are good you'll rely on your investment portfolio to cover the necessities. You can't afford to see your nest egg dwindle faster than necessary, especially if you can't just rebuild it by going back to work.
That's why it's so crucial that retirees avoid a major investing mistake that could reduce the chances their savings will last. And in 2022, it's more essential than ever for seniors not to make this error for a simple reason.
The investing mistake seniors really can't afford this year
That big investing mistake this year involves having the wrong asset allocation.
Specifically, while retirees don't want to be exposed to too much risk, they also can't afford to be too conservative in their investments. And that's especially true in 2022 because inflation is surging, which can eat away at the value of the nest egg retirees have amassed.
Unfortunately, many older Americans worry about stock market losses, especially when the market is experiencing a lot of volatility or when the future seems uncertain. Out of concern for preserving their nest egg, some seniors take most or all of their money out of the market in search of safer investments. But many end up forgetting that it's also risky to earn returns that are too low to keep pace with inflation.
Right now, inflation has reached a 39-year high, and the Consumer Price Index for January showed a 7.5% year-over-year increase in the costs of goods and services. This means any retirees whose portfolios didn't earn at least 7.5% over the past year have lost ground, and the buying power of their investments has declined compared with the prior year. With a portfolio that's overly conservative, seniors won't be close to a 7.5% annual return.
And this problem will likely be compounded by the fact Social Security increases historically haven't kept pace with inflation and may fall short this year as well -- despite the largest annual cost of living adjustment in decades.
How can seniors determine their ideal asset mix?
This doesn't mean seniors should put all their money into the market, hoping to earn returns topping 7.5%. But it does mean they can't afford to own only super-safe investments that earn just 1% to 2% a year.
Instead, they need to consider their risk tolerance very carefully to build a portfolio with an appropriate mix. An individual analysis based on life expectancy and the amount invested can be the best approach, but for a simple rule of thumb, you can just subtract your age from 110 to see what percentage of your money should be in the market. This would mean a 70-year-old would have a portfolio consisting of 40% equity investments while an 85-year-old would have 25% in the market.
By making sure you aren't being too risk averse, you can hopefully avoid losing too much ground during this difficult year for retirees.