A major mistake is not lowering risk before retiring, which experts say can derail your entire retirement plan. For example, if someone retired at the end of 2008 with all their money in the S&P 500, their savings fell by nearly 40%, as reported by 24/7 Wall St. That big drop was very bad for people about to retire or who just retired. Experts say people should lower risk before retirement by putting money in safer options like bonds, cash, or CDs.
Talking to a financial advisor can also help avoid expensive mistakes. Another big danger is called “sequence of returns risk,” which means bad market returns happen right before or just after retirement. This risk is serious because older investors do not have enough time for the market to recover from losses. Market downturns late in life can permanently damage retirement savings, experts warned.
Signs your 401(k) is too risky
One sign your 401(k) is too aggressive is when your account balance changes a lot, going up and down often. While gains feel good in strong markets, losses can hit hard and fast during market drops. To reduce this risk, experts suggest adding bonds, cash, and CDs to your portfolio, according to 24/7 Wall St. Another warning sign is constantly worrying about your 401(k)’s performance.
If you feel stressed all the time about your investments, your portfolio may be too focused on stocks. Markets do not only go up; they can fall without warning. Talking to a financial advisor is a good idea if you are worried about your savings. Another warning sign is poor diversification in your 401(k). This means all your money is in one place.
Experts say your money should be spread out. A good mix includes stocks, bonds, CDs, cash, and mutual funds. Spreading your money helps lower risk and keeps your savings safer. On the other side, a 401(k) can also be too conservative, which means it may not grow enough, according to 24/7 Wall St. A portfolio with very low risk may fail to provide enough money for retirement, experts warned.
Inflation can eat your savings
Retirement Planning said, “While these investments may offer safe returns, they often fail to keep pace with inflation, which can erode the purchasing power of an individual’s money over time”, as stated in the report by 24/7 Wall St. Retirement Planning also said a conservative portfolio “may not provide sufficient growth to meet retirement goals or build wealth.”Having money in only a few low-risk assets, like bonds or CDs, can be a sign your 401(k) is too conservative. If your returns do not beat inflation, you are actually losing buying power over time. Losing purchasing power means your money buys less in the future, which can hurt retirees. Experts again recommend speaking with a financial advisor before making changes.
Rule of 100 and smarter retirement planning
BankRate.com shared a simple method called the “rule of 100” to balance stocks and bonds. BankRate.com said, “With this rule, you subtract your age from 100 to get your stock allocation, with the remainder going into bonds”, as cited by 24/7 Wall St. BankRate.com added, “For example, a 40-year-old should have a 60 percent exposure to stocks and 40 percent to bonds, while a 65-year-old should have 35 percent in stocks and 65 percent in bonds.”
A new report says retirement is not just about picking the best stocks or ETFs. Even strong investments can become risky during retirement if the strategy is wrong. The key difference is between saving money and taking money out, which changes how risk should be managed. The report says many Americans are reworking their portfolios after answering three quick questions. Some people are even finding they can retire earlier than expected. Experts say anyone thinking about retirement should take a few minutes to review their plan and risk level.
FAQs
Q1. Why is a risky 401(k) dangerous near retirement?
A risky 401(k) can lose a lot of money fast, and older workers may not have time to recover those losses.
Q2. What is the biggest 401(k) mistake before retirement?
Keeping too much money in stocks and not lowering risk as retirement gets closer.