Everyone wants to save as much as possible for retirement, but a new survey shows that a good chunk of savers are taking on too much risk in their portfolios.
The study from Fidelity found that 23.1% of individuals saving for retirement in a 401(k) account controlled by the firm are overexposed to equities. Of those that are taking on more risk, 7% actually have 100% of their 401(k) invested in the stock market.
Who are the biggest culprits? Baby boomers. A whopping 37.6% of those that are heavily invested in stocks fall into that age group, which Fidelity labels as anyone born between 1946 and 1964. Boomers that placed 100% of their 401(k) into equities totaled 7.9%, which is slightly higher than the national average.
Striking a Balance in Your 401(k) to Reduce Retirement Risk
While investing some of your 401(k) into equities is a good way to ensure better returns in your account, it’s important to strike a balance between equities and other investment vehicles. Overexposure to the market can lead to big short-term losses.
Taking on risk can make sense when you are younger because you have a better chance, and more time, to recoup big losses. As you get older, though, waiting out a downturn doesn’t make sense and will lead to more financial pain. This is especially true when you have to start drawing out of your account in retirement, and further decrease those funds.
So if you are retirement age, or close to it, you may want to consider a different strategy for your 401(k).
A 401(k) Strategy to Consider
There’s an easy way to calculate how much of your 401(k) should be exposed to equities. Of course, these are only tips and everyone’s financial situation is different, but this method may be a good starting point for you.
It’s as easy as subtracting your current age from 110, according to USA Today. Using this formula, a 20-year-old could have around 90% of their 401(k) in the stock market, while a 65-year-old should consider having 45% of their account exposed.
What that means is actively managing your 401(k). It doesn’t hurt to check your account every once in a while, and at least once a year if you aren’t checking it currently.
Keeping track of your account a bit more also gives you a better feel of what’s working and what isn’t. A 401(k) can be a powerful tool to help you save for retirement, so taking a little time to study your account and consider different investment moves could be a boon for your nest egg.