We all want to do what's best for our financial futures, but sometimes it can be a struggle to figure out whether 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 bury your head in the sand so you don't think about it.
However, simple mistakes that you don't even realize you're making could potentially wreck your retirement. And there's one mistake in particular that close to half of older workers are making.
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Don't put all your eggs in one retirement basket
You've likely heard that 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 asset allocation.
There's no one right way to invest your money, but it's a good idea to build a balanced portfolio filled with higher-risk, higher-reward investments (like stocks) as well as lower-risk, lower-reward investments (like bonds). If you play it safe and only invest in funds that carry less risk, you likely won't see the types of returns you need in order to build a robust retirement fund. 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.
New research reveals that many older Americans might inadvertently be putting themselves in that situation. Approximately 38% of baby boomers are investing too heavily in stocks, a recent report from Fidelity Investments found. When you're younger, you can invest more heavily in stocks and other higher-risk investments, because if your savings take a nosedive during a recession, you still have plenty of time left for your retirement fund to recover. But if you're just a few short years from retirement and your savings take a hit, you might be in trouble.
It's essential to adjust your investments as you get older because the asset allocation strategy that worked when you were 25 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 like bonds. 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. According to Fidelity, around 90% of the average 25-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 investing in target-date funds.
Target-date funds work by looking at the age at which you want to retire (or your target date), then investing your money appropriately based on your current age and how comfortable you are with risk. When you have more time to save for retirement and are more comfortable taking risks, the fund will invest more aggressively in stocks. Then as you get older, the fund will gradually readjust your investments to lean more heavily on lower-risk funds. All you need to do is input your information before you begin investing, and the target-date fund will take care of the rest.
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.
