Investing in your 50s means balancing protection with returns to meet your retirement goals
Investors in their 50s are starting to realize a dangerous choice, the need to balance protection with growth to reach their financial goals.
This is especially true for those that haven’t saved enough. Investment calculators might tell them they need a double-digit annual return on investments to reach their magic number in retirement…what the calculators won’t tell them is that reaching for returns of 10%+ could wipe them out.
Even for investors that have been putting their money away for decades, the balancing act often tips too far to growth.
They keep chasing those high returns, investing almost exclusively in stocks. Every year the conversation goes, “I just want to squeeze out one last year of good returns in stocks, then I’ll shift my portfolio to bonds for protection.”
That next year rebalance keeps getting pushed back against ‘one more year’ in stocks. One day, 3.65 million investors wake up to realize their portfolios have crashed and they won’t be able to retire that year.
3.65 million, that’s how many Americans turned 65 years old in 2008 and I’m guessing at least as many that had to put off their retirement plans because of the stock market crash.
This is the fifth in our seven-part series on life-long investing. We started with how to create your own personal investment goals and understand your investor type. Throughout the series, I’ve shown you exactly how your investments change as you age, how you can keep your portfolio matched to your needs and how to keep your retirement on track.
Check out the other three articles in the series:
- Use this introduction to create your investment goals and understand your investor type
- Find the perfect portfolio for investors in their 20s
- See how you can invest in your 30s for the right amount of risk and return
- Learn how your investment needs start changing in your 40s
- Find out how to invest in your 50s to balance both safety and growth
- Protect your investments with these pre-retirement tips
- 3 retirement investing strategies to make your money last
In this article about investing in your 50s, I’ll show you exactly how to balance the rising need for protection with the continuing need for return. We’ll look at our three investor types and how to understand your perfect portfolio.
The Investor in their 50s
Time is the biggest factor in shifting older investors’ needs to asset protection from growth. The median American has $117,000 saved by their 50s according to survey data from Fidelity. That means half the population has saved less than this amount by their 50s and even saving that much might not be enough.
Many advisors recommend having saved at least five-times your salary by this point, a goal that would mean having saved over $200,000 for many people. That means the majority of Americans are dangerously behind in retirement saving at a time when they need to start thinking about how much their savings will provide.
The graphic shows how much you would need to save each year from age 55 to reach a $600,000 retirement goal on a 6.5% annual return. The median investor needs to save just over $1,000 a month to reach their goal while those further behind might need to explore other options like earning more to boost their savings.
The upside is that most investors at this point have passed the point where they need to pay for their kids’ educational costs. That means another decade or more for retirement saving without having to make withdrawals for large expenses.
Older investors also benefit from catch-up allowances in retirement plans starting at age 50, helping you to shield more income from taxes and boost your savings. Investors over the age of 50 can add another $6,000 to their 401k plans on top of the $18,000 contribution limit. The maximum contribution for IRAs and Roth IRA plans increases by $1,000 to $6,500 a year for catch-up contributions.
It might not be possible but catch-up contributions give you the ability to add more than $30,000 to your retirement savings in the years leading up to retirement.
Depending on how long you have to retirement, your time horizon will start to significantly decrease your ability to take investing risk. With less than a decade left to depending on your investments, you won’t have much time to bounce back in the event of a stock market crash.
This is an important change in your risk tolerance that many people don’t realize. Your willingness to tolerate risk, how you react to the ups-and-downs in your portfolio, might not have changed. Don’t forget to balance this change in ability to tolerate risk with a shift to safer investments.
Taxes for the investor in their 50s are likely at their high point, making retirement plan contributions all that more powerful. Max out your contributions to tax-deferred plans like your company-sponsored 401k and IRAs before investing in a Roth IRA.
Again, I have to warn you against chasing stock returns trying to catch-up on retirement savings with too much risk. We talked about this in the previous article on investors in their 40s. If you haven’t saved much to this point, it may be tempting to try for double-digit returns with an all-stock portfolio.
The problem is that any stock market weakness could wipe you out and leave little time to recover. A diversified portfolio of stocks, bonds and real estate can still produce a return of up to 7% annually while protecting you from the roller-coaster market ride. There are other ways to catch-up on your retirement savings including increasing your savings amount and starting a side hustle project for a couple of years.
Investor Types in their 50s
Through the series on investing by age, we’ve followed three investor types. These hypothetical investors are all around the same age but differ in other factors and investing needs. That means their ‘perfect portfolios’ that meet their goals are going to vary by risk and return.
Understanding which investments best fit your needs and personalities will help reach your financial goals with as little stress as possible.
Conservative Cody is our risk-averse investor. He knows enough about his investor type from previous experience to know that he does not react well to losses in his portfolio. Hearing that the market has fallen causes him to constantly worry about his money. He starts spending more time hovering over investing news and loses money to frequent trading trying to pick stocks.
Cody may also have a lower ability to tolerate risk from not having saved enough for retirement. He’s saved less than $50,000 to this point and is stretching his budget to save an additional $5,000 a year.
At a 6.5% annual return, that means he’ll have just under $250,000 saved by age 70. That’s not much to provide for retirement expenses but it’s doable along with social security. What he can’t afford to do is take too much risk and miss that average annual return goal or lose money.
Average Amanda is on track to reach her retirement goal with a return between 5% and 6.5% annually over the next decade or so. She has an adequate emergency fund and insurance to cover any unexpected expenses and she’s been working in her field long enough that she should be able to find work easily if she were to be laid off.
Risky Rebecca is the risk-taker of the three investor types. She doesn’t mind taking more risk in her portfolio. She’s invested through several stock market crashes. She doesn’t panic-sell out of her investments and knows they’ll rebound eventually.
Rebecca plans on retiring at 65 but wouldn’t mind working a few more years to reach her retirement goals. She’s already saved quite a bit for retirement and a small setback from stock market weakness wouldn’t put her off her goals.
Which Type of Investor are You?
One thing that many investors don’t realize, and something that ends up derailing a lot of portfolios, is that your investor type can change.
You may have been just fine with risk and investing for higher returns in your 20s but that doesn’t mean you’re in the same place later in life. Conversely, relatively little experience with investments and a risk-averse personality might have had you investing conservatively when you were younger but now maybe you’re ready to take on a little more risk.
Your investor type depends on several factors including:
- Your personality and how quickly you feel stress over losses or uncertainty. Some people just don’t like uncertainty and that’s fine. Investing conservatively will only lower your expected return slightly and you’ll sleep better at night.
- The size of your current portfolio versus your retirement goal. If you already have several hundred thousand saved relative to a modest goal, you can take a little more risk in your portfolio. If you have very little saved, you can’t afford to take losses because it could seriously limit your ability to meet your goals.
- If you are someone with a high degree of financial risk; whether through frequent and large unexpected expenses from a medical condition, lack of job security or income that fluctuates from year-to-year then you might want to take less investment risk.
While your personality might not change much, these other two factors can change and cause you to look at an investing plan differently. Maybe you’ve changed jobs and have more job security or are making more money, something that would allow you to take more risk. Maybe you haven’t saved as much as you planned and you want to make sure you protect what you have, something that would lead you to take less risk.
Understand that these potential changes in your investor type are compared to investors in your age group, not compared to investors in different age groups. Most older investors in their 50s are going to invest more conservatively compared to an investor in their 30s or younger. Just by virtue of having much more time until retirement, all younger investors will be able to accept more risk in their retirement plan.
What we are talking about here is that, compared to your age group, you might find your investor type change. This is why it’s important to review your investing plan every five or ten years. Retake a risk tolerance questionnaire, check your investment account balances and the return you need on this retirement income calculator and make sure your portfolio of investments reflects your unique needs.
Example Investments for People in their 50s
I’ve used the three investor types to create example investment portfolios throughout the series. There is a sample portfolio that matches each investor type from a conservative portfolio that focuses on protection while still providing a return. There’s an average investor portfolio invested for a balance between risk and return. There’s also a high-yield sample portfolio that takes a little more risk on the hope for a higher return.
None of these three portfolios are exceptionally high-risk. Even the high-yield portfolio holds a diversified mix of stocks, bonds and real estate to smooth out market risk. Neither are any of the three portfolios so conservative that you won’t be able to meet your investing goals. The most conservative portfolio holds enough stocks and real estate to help beat the effect of inflation on your money and provide for growth.
The conservative investor will continue the shift from stocks to bonds as they start focusing on protection and income.
From the portfolio in the last article, we’ve decreased stocks by 5% and increased to 10% the allocation to cash. We’ve increased this cash cushion in all three example portfolios to cover unexpected expenses that might come along like medical costs or job loss. Holding a marginally larger cash cushion, even beyond your emergency fund, can help to pay for potential unexpected expenses as well as give you flexibility to take advantage of a stock market crash by buying when the market is exceptionally low.
We’ve also shifted 5% from the real estate investments into bonds, increasing our investment in the diversified bond fund. This will help protect the portfolio if a market crash occurs over the next decade as you get closer to retirement.
The average investor will also shift out of stocks and real estate to the protection of bonds.
We’ve decreased the money in stocks by 10% to create the cash cushion and shifted 5% from real estate investments to bonds.
The change for the example high-return portfolio is relatively minor even though the investor is going through the same fundamental life-changes as the other two investor types. Even the investor that likes to take risks needs to protect their money and make sure their years of hard work and investment aren’t wasted in one tragic market crash.
I’ve sold 10% from the stock allocation to create a cash cushion. I’ve also sold the peer-to-peer lending investments in favor of the two bond funds. This view on p2p investing might change once we have more information on how the investment reacts in a recession. Since the industry is relatively new, we just don’t have enough information to say that it can still be a reasonable part of an older investor’s portfolio.
Understand that these changes in your portfolio don’t necessarily need to happen like clockwork on your birthday every ten years. I’ve structured the series by decades because that’s the way most people think, in terms of being in their 50s or 40s or 20s.
It’s up to you whether you review your investment plan every five or ten years and whether you make changes. Obviously if stocks have fallen 20% or more in a recent crash, you may want to wait a few years until the market recovers to sell out of your stocks and rebalance money into bonds.
That doesn’t mean you can put off your portfolio changes indefinitely. An investor in their 50s still investing as if they were 20-years old is setting themselves up for a huge risk when the market tumbles. It’s ok to wait a few years to re-match your investments with your goals but not ok to wait more than 15 years.
Return Expectations for Each Example Portfolio
The expected return on our three sample portfolios from the returns we estimated in the prior article have all come down about half a percent. That’s not a big change but probably the most significant we’ve seen yet in the series. We took quite a bit of risk out of the portfolios and that safety comes at a price.
The expected return for the conservative investor drops to 6.4% from 7.0% for the same investor type in their 40s. As with the other two portfolios, this is due to the decrease in stocks and the increase in cash.
The expected return of the average investor drops to 6.9% from 7.5% in the prior article. From the average portfolio in their 20s, we’ve seen the expected return drop gradually from 7.7% annually. That’s not a huge change and a 6.9% annual return will still double your money in ten years.
The high-return investor sees their expected return drop to 7.2% from 7.8% earlier on the reduction in stocks and the shifting from p2p investments into regular bonds.
All three of these example portfolios will generate more cash than examples in previous articles. This is due to the higher allocations to bonds and real estate. Make sure you continue to deposit savings each month but you can probably wait three to six months to invest your balance.
Closing Summary and Action Steps for Investors in their 50s
We’ll cover pre-retirement investing in the next article and finally how to invest during retirement. We’ve seen a gradual shift from taking more risk for higher return to portfolio protection and income throughout the series. In the next two articles, we’ll see this transition complete to the point that you are investing most of your money in bonds while still holding enough stocks and real estate to provide for growth and inflation protection.
- Revisit your life-long goals. What does retirement look like now that you’ve worked for a few decades and know better what you want? Are you still planning on retiring at the same age?
- Is your retirement target still enough to support your goals? You might actually find you need less if you plan on working part-time or taking up a side hustle in retirement.
- Revisit your investor type by taking a risk tolerance questionnaire and rechecking your need for return on this 401K investment calculator. Understand that it’s ok to change your investments to a different approach if your investor type has changed.
- Take advantage of catch-up contributions even if just for a few years to give yourself a better shot of reaching your retirement goal.
Investors in their 50s often see their goals and retirement plans change. You may start thinking less about full retirement and more about what you’re actually going to do with your time. This might mean starting a second career, even if it’s only part-time, and can mean big changes in your investment plan. Let those changes happen and be ready to change your investments when they do. Don’t worry about all the noise and ‘market analysis’ you hear on TV. Follow a gradual plan to shift your investments from growth to protection and income to keep your finances on track.