Recent changes within the stock market have acted as a warning to certain people. Specifically, Americans who are too old to be investing large amounts of money in the stock market. Many of these people are, unfortunately, unlikely to take that warning.
You see, surprisingly, the market actually rose during most of the pandemics. And this occurrence, in combination with over a decade of low yields for bonds, has led to many older people investing more money than they should in the stock market. However, this decision by them is being tested.
Investing in the stock market during your working years is one thing. But, an investment like that near or during your retirement is quite another. Market downturns could lead to the depletion of your retirement savings. In the past weeks, in particular, many major market indexes declined sharply. As an example, intraday trading has led to the S&p 500 swinging by more than 3% on certain days.
Why Do People Have Too Much in Stocks?
Investors will point to the relatively fast recoveries from the market drops in the 2000s, and again in 2020. They don’t see a better place to put their nest egg. But stock market volatility becomes an issue as you near (or enter) retirement. This is because as you get older, the less time you have to make up for losses.
There’s a reason why some older Americans could be taking risks like this. They could have money coming in, in the form of paychecks such as pensions. Or, maybe they’re investing in stocks because they think the risk is worth a potentially higher return than bonds. Some investors might be looking to fund a retirement lifestyle that they couldn’t otherwise afford. Many people began investing before the proliferation of target-date funds (funds that hold mixes of stocks and bonds and become more conservative over time.) These types of funds are frequently used by people in their 20s and 30s, and maybe even early 40s. However, older investors don’t typically use this strategy and are more “do it yourself” investors.
A recent article from the Wall Street Journal recommends that “investors who plan to retire by 2025 hold 57% of their investments in stocks.” But, unfortunately, “About 40% of 401(k) investors aged 60 to 69 hold 67% or more of their portfolios in stocks.” The article also warns that “some investors are unaware that their portfolios are as heavily tilted towards stocks as they are.” Some people “come in thinking they have a 60/40 portfolio only to discover it has drifted to 80% in stocks because equities have risen so much.”
Keeping Your Money Safe
A number of news sources, the Wall Street Journal included, recommend that you take steps to assess just how much risk you can afford to take. Furthermore, you should ensure that you stick with your desired stock allocation. And, here’s a way of assessing your risk tolerance: The Rule of 100.
The “rule” of 100 is a simple calculation you can do, to help determine your risk tolerance. As we said previously, the older you get, the less time you have to recover from losses. This is what the Rule of 100 is based on. The older you get, the less of your portfolio should be in riskier investments. Subtract your age from the number 100. For example, let’s say you’re 64 years old. 100 – 64 is 36, so 36% is the maximum amount of your income that can be put into risky investments such as stocks. The remaining 64% should be kept in safer accounts. And, on the topic of safer accounts…
Products to Keep Your Savings Safe
While you could put that money that you’re keeping safe in a 401(k) or an IRA, you could look into an alternative: Reach out to us. We can discuss options with you such as IUL insurance policies or fixed indexed annuities. These insurance products can not only protect your money, as it isn’t affected by market volatility but also get you reasonable returns over time, based on the performance of a stock market index. Furthermore, insurance products don’t apply to the same tax rules as traditional savings accounts. Want to learn more? Contact us.
Another important step to keeping your money safe, as we mentioned earlier, is paying close attention. To quote the Wall Street Journal one more time: “Have a systematic approach, and follow it.” You don’t want to end up finding out that more of your money was invested in the stock market than you thought.
Looking for alternative ways of increasing your retirement savings, without putting the money you’ve already saved at risk? Reach out to Messina’s Wealth Management today!