There are seemingly countless factors to consider as you're preparing for retirement. Some of these factors are fairly obvious, such as deciding what age to retire or determining how much you need to save.
Others, though, are more subtle. These aspects of retirement planning can be dangerous, because if you're not preparing for them, they could quickly derail your plans. And there's one mistake nearly a quarter of workers are making that could devastate your financial future.
The subtle mistake that could wreck your retirement
Most workers are aware of how much they're saving for retirement. But do you know how your investments are allocated within your portfolio?
You're likely investing in a mix of stocks and bonds, but just how much you're allocating to each type of investment matters. Stocks tend to be riskier than bonds, so the more your portfolio is weighted toward stocks, the more risk you face during a market downturn.
Generally, the older you are, the more heavily you should be investing in bonds. Younger investors have the luxury of riding out stock market storms, but as you get closer to retirement, you can't afford to take as many risks. If the market crashes right as you're about to retire, you don't have years to let your savings recover.
Despite the risks, many older workers are investing too much in stocks. In fact, 23% of employees are investing too heavily in stocks for their age, according to a survey conducted by Fidelity Investments. In addition, baby boomers -- the age group closest to retirement -- are the most likely to be allocating too much of their portfolios toward stocks.
Rethinking your asset allocation
Every year or so, it's a good idea to take a look at how your investments are allocated and see if you need to make changes. You don't want to wait until the market takes a turn for the worse to make these adjustments, because by then it will be too late.
There's no hard-and-fast rule as to how much you should allocate to stocks versus bonds. Your decision will partly depend on your tolerance for risk. If you can tolerate higher risk levels, you might continue to invest aggressively in stocks to see higher rates of return. But if you're worried about a market downturn wiping out your savings, you may opt to invest much more conservatively.
No matter how you choose to invest, you should still have a combination of stocks and bonds in your portfolio. Allocating 100% of your portfolio toward stocks can be incredibly risky. But investing solely in bonds can be equally dangerous because your savings will grow at a snail's pace -- making it unlikely you'll reach your retirement goals.
To gauge whether you're in the right ballpark, estimate your asset allocation using the rule of 110. Subtract your age from 110, and the result is the portion of your portfolio that should be invested in stocks. In other words, if you're 40 years old, aim to invest 70% of your portfolio in stocks and 30% in bonds.
Again, this is just a guideline, so be sure to account for your risk tolerance as well when divvying up your investments. How much you invest in stocks versus bonds is a largely personal decision, but be sure you're aware of how your choice will affect your investing strategy. By playing it just safe enough, you can maximize your savings while limiting your risk.