Reaching the age of 50 has major implications in many areas of your life -- especially your investments. If you've avoided thinking much about retirement, hitting 50 is a wake-up call to start getting your retirement financial planning in order. If you've been planning and saving for decades, it's still a good time to check in on your progress toward your financial goals and see whether any course corrections are necessary as retirement approaches.
There's no one-size-fits-all investing approach for every 50-year-old. A lot depends on when you expect to retire and how much you've managed to save for retirement thus far. Below, you'll find a few common scenarios, along with some guidance on how you might invest in each one. Look and see which scenario most resembles your own, and you'll find the guidance you need to move forward.
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1. You expect to retire in your mid-60s
If you're planning on working until the traditional retirement age of 65, then the important thing to remember is that even after your milestone 50th birthday, you still have 15 years to go until you need to access your retirement savings. That gives you more than enough time to maintain an aggressive stance toward your investments, and that's especially important if you're a bit behind the curve in accumulating retirement savings.
In terms of asset allocation, this relatively long time frame warrants a much larger allocation to stocks than to other investments, according to The Motley Fool's Robert Brokamp. Broadly speaking, a mix of 85% stocks, 5% bonds, and 10% alternative investments is a prudent way to invest for a 15-year time horizon. Drilling down on the stock portion of your portfolio, a 25% allocation to large-cap stocks can make up the core of your stock position, while 15% in mid-cap stocks and 15% in small-cap stocks can provide a boost in growth. A 30% position in overseas stocks adds diversification and provides some of the faster growth available from emerging markets across the globe. Meanwhile, the alternative portion could be split between 5% in real estate investments and 5% in commodity-related investments.
2. You want to prepare for an early retirement
If you're looking to get out of the rat race before you're too old to enjoy being retired, then a more conservative approach might be in order. Within 10 years of retiring, you'll want to position yourself to have reliable sources of funds that you'll be able to spend early in retirement without worrying about whether the stock market will go through a correction or a bear market. That means boosting your allocations to less volatile assets like bonds, and it also means focusing more of the stock portion of your portfolio on safer large-cap names.
One recommended allocation involves reducing your stock position to about two-thirds of your portfolio, with 25% invested in bonds and the remaining 8% in alternatives like real estate and commodities. Within the stock portion, the large-cap allocation should rise to 30%, while mid-cap and small-cap exposures decline to 12% and 10%, respectively. Cutting your international-equity allocation to 15% will direct more of your funds away from foreign companies and toward more reliable U.S. stocks.
3. You're way ahead of the game
Most investors need the somewhat aggressive game plans described above because they haven't saved enough by the time they turn 50 to be financially secure. However, if you're already ahead of the curve -- either because you've done an extraordinary job of saving and investing or because you've received a major financial windfall like an inheritance -- then you don't necessarily need to take on as much risk.
Most 50-somethings should still retain some stock exposure, in part because the income dividend stocks provide is often greater than what bonds pay, and in part because stocks offer growth opportunities that bonds and other alternatives don't. An asset allocation of 55% stocks, 40% bonds, and 5% alternatives can do the trick for those who are comfortable but still hope to get more out of their portfolios in the years to come. An appropriate stock allocation might be 25% large caps, 20% split between mid-caps and small caps, and 10% international stocks. For those who are truly set with their savings, an allocation closer to 60% bonds can be more appropriate, with stock allocation reductions coming evenly from the four sub-categories.
Be smart about investing at 50
Turning 50 is a good time to get your finances in order in anticipation of your retirement. Whether you expect to keep working a long time or you could quit working tomorrow, the right asset allocation can ensure that you'll have the financial resources you need well into your golden years.
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