Q. I’m 50 and I save the max to my 401(k). It’s in a 75 percent stock/25 percent bond split. When is the right time to start getting less aggressive? I don’t think I will retire before age 65.
A. We’re glad to see you’re actively planning your retirement.
For most, there has been a belief that as we near retirement, we should reduce our exposure to stocks and increase bonds, said Betty Thomas, a financial planner with Lassus Wherley in New Providence.
Thomas said there are several reasons for the widespread belief: because investors figure if they’re retiring and won’t be able to contribute to retirement plans anymore; if the market has significant losses our portfolios may not have time to recover if invested in stocks; we want the income generated from bonds to supplement income while in retirement; and we want safety.
They’re all valid reasons.
Thomas said although you have a significant portion of your account allocated to stocks, there are a few things to consider before moving to a less aggressive portfolio.
First, she said, think about what your needs will be during retirement. How will your life differ once you are no longer working? How will your expenses change? Will you do more or less? What other assets have you set aside in addition to the 401(k) plan to supplement income? If you retired tomorrow, how long would your assets last?
“Once retired and enjoying the golden years, most retirees didn’t plan on going back to work as a part of the `golden years’ plan,” Thomas said. “But it happens quite frequently.”
Thomas said changing the portfolio to become less aggressive should depend on what your future needs might be and how you are preparing for retirement.
For example, she said, if you have not saved enough for retirement, you may need to invest — maintaining a more aggressive allocation — to target a higher rate of return. That will entail more risk because the income may be needed.
At the other end, she said, if there will be access to funds to supplement retirement needs, then the allocation could be changed to lower risk.
To answer your question of when the right time is to get less aggressive, it depends.
“Consider your risk tolerance. If you find that your current allocation makes you uneasy, consider making changes to reduce the risk,” Thomas said. “Small changes, such as to an asset class can lower risk in a portfolio, while still providing decent returns over time.”
She said a well-diversified portfolio has historically provided very respectable returns with much lower risk. Once you have a well-diversified portfolio, review and rebalance at least monthly.
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