Retirees Are Making This Huge Mistake With Their Investment Portfolios
KEY POINTS
- Among investors 85 or older with taxable brokerage accounts at Vanguard, one-fifth have nearly everything in stocks.
- The stock market is volatile, and retirees who put too much in stocks are vulnerable to market downturns.
- To protect your retirement savings, put a portion of it in low-risk securities and cash equivalents, such as bonds, CDs, and high-yield savings accounts.
When you retire, what you need from your investment portfolio changes. During your career, you most likely focused on investing to build wealth. Once you're not working anymore, preserving wealth becomes more important so you don't run out of money.
Not all Americans adjust their investments to account for this change. In fact, a sizable number of older adults are making a mistake that could jeopardize their retirement.
Here's the mistake retirees are making with their investment portfolios
Retirees are keeping too much money in stocks and neglecting lower-risk options, such as bonds. One-fifth of investors 85 or older with taxable brokerage accounts at Vanguard have nearly all their money in stocks, according to a report by the Wall Street Journal. That's also the case for almost a quarter of investors from 75 to 84.
Not all older investors are putting nearly everything in stocks. But there has been a shift in how retirees invest their money. In 2011, 38% of Vanguard 401(k) investors over age 55 had at least 70% of their portfolios in stocks. Now, nearly half do.
Why a stock-heavy portfolio is risky for older investors
Stocks are an excellent investment. Historically, the stock market's average return has been about 10% per year, making investing in it one of the best ways to build wealth. But stocks can be a very volatile, boom-or-bust type of investment, as well.
While the stock market has more good years than bad, it has dropped quite a bit in many of those bad years. Just last year, the S&P 500 (an index tracking 500 of the largest publicly traded U.S. companies) dropped 19.44%. In 2008, it dropped 38.49%.
If you have 90% to 100% of your portfolio in stocks, it will take a huge hit during years like these. Younger investors can weather the storm, as long as they don't need the money anytime soon. Retirees, on the other hand, may be forced to sell investments at a large loss.
Imagine you have an investment portfolio of $1 million. If that's all in stocks, and they lose 25% of their value, you'll be down to $750,000. The market has always bounced back so far, but it sometimes takes several years. That puts you in a tough position when you're retired and withdrawing from your portfolio regularly.
Balance out your portfolio with low-risk securities and cash equivalents
You should continue investing in stocks when you're retired, but you should also put some of your money in low-risk assets. These will increase stability in your investment portfolio and protect you when the market is volatile. Here are a few options:
With each of those, there's little risk of losing money. Most CDs and high-yield savings accounts have FDIC insurance, so even in the unlikely event of a bank failure, your deposit would be covered for up to $250,000. Bond security varies depending on the bond issuer. If you choose bonds backed by the U.S. government, such as Treasury bonds, you can keep risk to a minimum.
You'll also need to decide on your asset allocation -- how much of your portfolio you have in stocks compared to bonds and banking products. If you're retired, or retiring soon, having 40% to 50% of your portfolio in low-risk assets is a popular way to go. You'll still see your portfolio grow during bull markets, since 50% to 60% would be in stocks. And your portfolio will be more resistant to market downturns.
The right asset allocation depends on your age and your risk tolerance. You may want to set up your portfolio a bit differently based on where you're at in life, the size of your portfolio, and the amount of risk you're willing to take on. But if you're retired, ensure your portfolio isn't too stock-heavy.
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