Investment Strategies for People Close to Retirement
When retirement is a long time in the future, many people invest their money as aggressively as possible. They choose growth stocks that have the biggest chance to gain value over the long term, even if they lose value in the short term. As retirement draws closer, however, your strategies should change. When you get closer to retirement age, you have less time to recover from market losses. For this reason, it makes sense to change your investment strategies.
Take Advantage of Make-Up Contributions
If you are age 50 or older, you are allowed to put more money into tax-advantaged retirement accounts. Your allowable yearly IRA contribution, as of 2013, increases from $5,500 to $6,500 once you reach age 50. If you participate in employer-sponsored retirement plans, like a 401(k), you are allowed to contribute up to $23,000 per year at this age. Take advantage of these increases to ramp up your savings in the years right before retirement.
Move to Fixed-Rate Investments
As you move closer to retirement and have less time to overcome market and investment downturns, you should move more of your funds to less risky investments such as bonds, certificates of deposit and money market mutual funds. Any money you will need in the short term, usually defined as within the next five years, should be in a stable, fixed rate investment.
Don't Forsake Stocks Completely
Even as you put more money into stable investments, do not eliminate stocks entirely from your portfolio. Retirement could last 30 years or more, still giving you time to grow stock investments and recover from losses. Some experts suggest investing a percentage of your portfolio in stocks equal to 120 minus your age. Under this example, if you are 60 years old, you should invest 60 percent of your portfolio in stocks. If you want a more conservative mix of stocks to mitigate risk, consider index funds and less aggressive stock mutual funds.
Use taxable accounts in addition to any retirement plans. These might include such as savings accounts, certificates of deposit and mutual funds. Taxable accounts allow you to withdraw money without paying any taxes on the withdrawals, like you will have to with a 401(k) or traditional IRA account. Also, taxable accounts are not subject to any investment limits, and they allow you to save as much of your income as you can.
Plan for Withdrawals
As you get close to retirement age, consider what you will withdraw from your assets in order to make your portfolio last for as long as you need. Typically, experts recommend you withdraw no more than 4 percent of your portfolio value each year to ensure that you will not outlive your money. If you need $60,000 in income per year, you would want to have $1.5 million in assets under this rule.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.