It's common knowledge that as you get older, you should shift more of your assets into safe-haven investments, such as U.S. Treasury bonds. However, it generally makes sense to continue investing some of your money in stocks even at age 60 and beyond. Although stocks come with a relatively high risk of losses, eliminating them from your portfolio exposes you to a different kind of risk: the risk that you'll exhaust your savings because they're not growing fast enough to keep pace with inflation.
The average 60-year-old can't afford to chase hot stocks that may either skyrocket or go down in flames. Fortunately, there are safer, more responsible ways to maintain some stock exposure as you reach the end of your working days.
Set your sights on a target-date fund
Many investment management firms offer target-date funds, which invest your funds in a mix of stocks and bonds that automatically changes as you near the date when you plan to retire.
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Target-date funds allocate different percentages of your assets to various stock and bond funds, but generally, their allocations look pretty similar. For instance, if you're 60 years old and you plan to retire in 2022, then you might consider buying shares in the Vanguard Target Retirement 2020 Fund (VTWNX 0.04%), which invests 55% of its assets in stock funds and 45% of its assets in bond funds. This allocation allows investors to benefit from the potential upside of the stock market while also providing some insulation from downturns by investing in income-paying bonds, which typically don't gain or lose as much value when the market rises and falls, respectively.
Here's a more detailed look at the fund's current allocation:
| Vanguard Target Retirement 2020 Fund | ||
|---|---|---|
| Underlying funds as of July 31, 2017 | ||
| Rank | Fund name | Percentage |
| 1 | Vanguard Total Stock Market Index Fund Investor Shares | 33.30% |
| 2 | Vanguard Total Bond Market II Index Fund Investor Shares** | 28.60% |
| 3 | Vanguard Total International Stock Index Fund Investor Shares | 22.40% |
| 4 | Vanguard Total International Bond Index Fund Investor Shares | 12.10% |
| 5 | Vanguard Short-Term Inflation-Protected Securities Index Fund Investor Shares | 3.60% |
| Total | 100.00% | |
The Vanguard Target Retirement 2020 Fund is up about 10% in the past year, while the S&P 500 stock market index -- the most common benchmark for U.S. stock performance -- is up about 13%. That's a pretty solid return, given that bonds represent nearly half the fund. It's also better than the returns of the fund's industry peers, which have returned about 9%, according to Morningstar. That said, this year's double-digit returns are a bit abnormal for this fund, so investors shouldn't bank on such high returns in the future. Over the past 10 years, the fund's average annual return is about 5%.
Another reason to consider Vanguard's Target Retirement 2020 Fund is its low costs. While investment management fees vary widely across the industry, the average expense ratio among Vanguard's competitors is 0.41%, according to Lipper. Meanwhile, this Vanguard fund only charges 0.14% of assets per year, and that includes the fees associated with its underlying stock and bond holdings. That's a rock-bottom fee for a diversified basket of stocks and bonds.
Embrace ETFs
If you prefer custom-designing your own investment portfolio, then you might want to invest in exchange-traded funds, or ETFs, instead. Like target-date funds, ETFs own a number of investments. However, unlike target-date funds, ETFs allow investors to focus on specific groups of equities and bonds depending on their investing style and their goals. They have lower expense ratios than traditional mutual funds, and they're also more liquid because they can be bought and sold throughout the day, much like individual stocks.
Vanguard's Total Retirement 2020 fund invests in the Vanguard's own Total Stock Market Index Fund and Total International Stock Index Fund. However, you may prefer to stick with big U.S. companies by investing in the S&P 500 market index. Or maybe you're interested in the FTSE Developed All Cap Ex US Index, which is composed of securities of all sizes from about two dozen developed markets, including Canada, Europe, and the Asia-Pacific region.
If so, then you could buy the Vanguard S&P 500 Index ETF (VOO -0.83%), which mirrors the S&P 500 index and charges a microscopic 0.04% expense ratio. You could also buy the Vanguard FTSE Developed Markets ETF (VEA 0.01%), which charges only 0.07% -- a fee that's 93% lower than its average competitor's -- to grant you exposure to international stock markets.
On the bond side of your investment portfolio, two ETFs that might make sense are the Vanguard Total Bond Market ETF (BND 0.14%) and, if taxes are a concern, the Vanguard Tax-Exempt Bond ETF (VTEB 0.09%).
The Total Bond Market ETF gives investors broad exposure to U.S. investment-grade bonds. It has about 64% of its assets in U.S. Treasury or agency bonds, and because its holdings are mostly short to intermediate duration in length, its a bit less exposed to the downside associated with rising interest rates, which typically take a bigger toll on long-term bonds. Its yield is 2.36%, and it has returned about 3% this year. Over the past 10 years, its average annual return is about 4.4%, and its expense ratio of 0.05% is as about as low as they come.
Vanguard's Tax-Exempt Bond ETF could be a good option if you're in the highest federal income tax bracket and your goal is to limit your tax bill. This fund invests in investment-grade U.S. municipal bonds issued by states and local governments, or other agencies that are exempt from federal income taxes and the alternative minimum tax (AMT). It doesn't generate barn-burner returns -- its average annualized return is 3.36% since its inception in August 2015 -- but with a low 0.09% expense ratio, it may be a smart investment for some high-earning investors.
Note: I've used Vanguard funds as examples because they typically charge the lowest fees in the industry, but there are many other fund providers out there if Vanguard products don't exactly suit your needs.
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Find great investments on your own -- if you can
If cookie-cutter investment options aren't your thing, and you prefer investing in individual stocks, then now may be a good time to add some income-producing stocks to your portfolio. Not only do dividend-paying stocks tend to be more stable than non-dividend-payers, but their cash payouts can provide steady income when you're no longer receiving a paycheck. Many dividend-paying stocks have rallied to multiyear highs recently, making them a bit expensive at the moment. However, there are some stocks on the market that could offer a nice blend of growth, income, and value.
For instance, investors who want the safety associated with big-cap stocks might consider buying energy giant ExxonMobil's (XOM 1.05%) stock while it's at a two-year low. ExxonMobil's shares have fallen on hard times because growing oil and gas production at U.S. shale fields has knocked down the price of crude oil and natural gas. There's no telling when oil and natural-gas prices will find their footing, but commodity stocks like this are cyclical, so it's reasonable to expect that a rebound will happen eventually. If so, then ExxonMobil's cost-cutting and long-term demand from developing global markets could make now a smart time to buy, especially since its shares yield 3.9%.
That's only one example of a potentially senior-friendly stock; there are thousands more to choose from. If you want to try to beat the market by picking individual stocks, you should make sure you understand the fundamentals of long-term investing and are willing to research every potential purchase. If you're an inexperienced stock investor, then consider dipping your toes in the water by allocating a very small portion of your portfolio (less than 5% to begin with) to hand-picked stocks. That way you won't put your financial future in jeopardy as you learn the ropes and find out whether you're cut out for stock-picking.
Planning ahead
No matter which investments are right for you, now is the time to make sure that you spend plenty of time fleshing out your retirement plans, including the ways you'll curb expenses and boost income. Social Security only provides about 40% of the average beneficiary's pre-retirement income, and the average retiree's income from investments falls shy of bridging that 60% gap. Paying off debts like mortgages, loans, and credit cards before retirement is smart, but you should also investigate ways increase your retirement income, like racking up Social Security's delayed-retirement credits. Ultimately, the likelihood you'll achieve the retirement you want will depend a great deal on the steps you take now to prepare yourself financially.
