Investing over 50 may require you to adjust your portfolio and your savings rate because retirement is rapidly approaching. While many of the same actions that were appropriate at a younger age continue to be so, now is a good time to assess your progress towards your financial objectives. Evaluating what your spending needs are likely to be in retirement and the amount of savings you will require to meet them is important to identifying what actions you need to take.
If you are on track to retire early, or if you have not rebalanced your portfolio for several years, you may find it desirable to begin reducing your exposure to stocks slightly in favor of less risky bonds. Bonds will also provide you with current income in retirement. Determining your probable withdrawal rate from your assets in retirement is very helpful. The higher it is, the more stocks you will need. Eliminating stocks is unwise because of inflation. Inflation reduces the value of a dollar over time, so your retirement assets must grow at least as fast as inflation in order to keep up. Stocks are much more likely to do this than bonds.
The next aspect to consider is your savings rate. If you have inadequately saved thus far, you will need to increase your savings rate. Fortunately, those 50 years old and older are allowed to contribute more to their 401(k) and IRA plans than those who are younger. Maximizing your retirement plan contributions can be extremely helpful because the earnings are tax-deferred, or in the case of a Roth IRA, tax-free.
Another important consideration is maintaining sufficient cash reserves so that unexpected expenses do not require you to disrupt your long-term investment plan. Having to sell when the market is down is bad enough, but having to take an unqualified withdrawal from a retirement plan is even worse. Not only do you have to pay income taxes on the amount withdrawn and lose the opportunity for it to continue to grow tax-deferred or tax-free, but you also have to pay an additional 10% penalty tax. These taxes are devastating to long-term asset accumulation, so it is important to avoid them by having sufficient liquidity. Cash allows you to let your investments ride out market fluctuations and continue to grow so that you will have more savings in retirement.
Like investing at younger ages, diversification and investment costs remain important. It is wise to find out how much of your retirement assets are held in the form of your employer’s stock. If possible, you almost certainly want to sell it and diversify into other investments. Even the strongest companies have the potential to fail over the many years you have both before and during retirement. If you are forced to hold a significant amount of company stock, you are well advised to make sure that your other investments do not include more of it. While a broadly diversified stock portfolio becomes less risky over long holding periods, the same is not true for a single stock.
Because investment costs detract from investment returns, it is important to minimize them. Avoiding commissions, high mutual fund fees, and account maintenance fees will leave you with significantly more money in retirement. The effects of compounding, which are so beneficial for growing your assets, also magnify the effects of investment costs. In addition, selecting tax efficient investments for taxable accounts considerably enhances your long-term returns.
While diversification, keeping sufficient cash reserves for emergencies, and minimizing investment costs are important at every age, those over 50 years of age have additional considerations. A moderate decrease in exposure to stocks in favor of bonds may be appropriate as retirement approaches. Taking advantage of the increased contribution limits for 401(k)s and IRAs can be very beneficial. Ensuring that your portfolio is adequately diversified and does not hold a substantial amount of company stock can also reduce the risk of your retirement assets not being adequate when you retire.
