A widely accepted investing rule of thumb is to subtract your age from 100 to figure out the percentage of your portfolio that should be in stocks instead of more conservative investments such as bonds. At age 50, according to the rule, half your portfolio should be in stocks and the other half in bonds. At age 60 you’d drop to 40 percent stocks, and by 70 just 30 percent of your portfolio would be in stocks. Years ago this seemed like pretty sound advice, but today not so much.
Those who are 60 and over enjoy longer life spans today, but they also tend to have lower retirement savings and increased medical expenses—a perfect storm that can spell financial trouble for many older adults. These dynamic changes have made the conventional rule of thumb obsolete. “The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance,” said Jake Loescher, a financial advisor at Savant Capital Management in Rockford, Ill., in U.S. News & World Report.
To compensate for today’s longer life spans and inadequate retirement savings, many financial planners now recommend starting with the number 110 or 120—instead of 100—to determine an ideal asset allocation. Under this new guideline you should have 70 to 80 percent stocks in your portfolio at age 40 and 60 to 70 percent stocks the year you turn 50. At age 60 your portfolio would be 50 to 60 percent stocks, significantly higher than the previous 40 percent recommendation.
Still, investing more aggressively isn’t necessarily the right strategy for everyone in their 60s (or 70s and 80s, for that matter). What matters more than any guideline is your particular situation. “A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” said Loescher.
Things to Consider
How aggressively you should invest during your 60s and beyond depends on several factors, including:
- Life Expectancy – Consider your current health, habits and genetics. If you expect to live into your 90s or even 100s, it makes sense to keep more of your investments in the stock market now so you can keep growing that nest egg.
- Interest Rates – If inflation rises faster than interest rates, you can actually lose money by keeping it in low-interest-bearing accounts and bonds. A better choice would be low volatility, dividend-paying stocks that provide a better return than bonds while still keeping risk under control.
- Retirement Cash on Hand – If you don’t have enough cash to last through your golden years, it probably makes sense to put more money into stocks. An experienced financial planner can help you decide how much based on your situation, risk tolerance and time horizon.
- Estate-Planning Goals – Even if you’re financially set for retirement, you may want to continue building wealth to leave an inheritance to your children and grandchildren or support a cause that’s dear to you. If so, the time horizon for your portfolio will be longer, which means staying invested in stocks is appropriate. As long as you can tolerate a little volatility in your retirement income (emotionally and financially speaking), you can continue to invest in stocks no matter how old you are.
- Investing Attention Span – As you age you might become less interested in managing your investments, but that doesn’t mean you should put all your money into certificates of deposit. A better option may be diversified investments, such as index ETFs and target-date funds, which don’t require constant monitoring. That way you can take a more passive role in your investments while still benefitting from higher potential earnings.