Monitoring your investment portfolio too closely can be a recipe for disaster, but so can neglecting to adjust your portfolio as you age. Everyone wants to have as much retirement savings as possible, but your portfolio should be built based on your personal investment objectives and risk tolerance, which will change as you get older. When you’re younger, you can afford to weather the ups and downs of the stock market to maximize your account total. But once you reach retirement age, that may not be the case.
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Most seniors will need to move at least a portion of their account balances into income-producing investments by the time they retire to supplement Social Security benefits and other sources of income. So, should you still be investing some money in the stock market when you’re 65? The answer varies from person to person, but here are some strategies to consider.
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General recommended allocation for age 65
Traditionally, financial models have recommended that investors subtract their age from 100 to determine their portfolio’s stock ownership percentage. For example, if you’re 65, the model would tell you that 100 minus 65 equals 35, so your stock ownership percentage should be 35%. But as Americans have started to live longer, many of these models have raised the starting value to 110 or 120, meaning a 65-year-old would have closer to 45% or 55% stock ownership.
Respected investment firm T. Rowe Price employs a model that is closer to this more modern asset allocation, recommending that investors in their 60s hold 45% to 65% stocks, 30% to 50% bonds, and 0% to 10% in cash. Charles Schwab recommends that investors ages 60 to 69 hold 60% stocks, 35% bonds, and 5% cash.
Some investors may instinctively feel that this allocation is too high, after years of being told that they should reduce or eliminate portfolio risk as they approach retirement. But this could cause long-term financial problems. Many seniors live 25 years or more after retirement, and without a proper allocation to stocks, their accounts could be underfunded. If you have a 25-year investment horizon, it may be a mistake to avoid stocks entirely, because the market has never posted 20 consecutive years of losses.
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What types of stocks should you own if you’re 65?
Many older investors probably have some stock holdings, but that doesn’t mean they should be as aggressive with their portfolios as they were when they were younger. For example, if you’re in your 20s, you might want to invest a little in stocks with big growth potential, like biotech or other promising tech stocks. But by the time you’re 65, your need for rapid growth is likely gone. At that point, you don’t want to give up on growth entirely, but you should generally lean toward blue chip stocks.
One surefire option for many seniors is to invest in dividend-paying stocks, most of which are considered blue-chip stocks. These types of companies generally pay stable dividends, remain well-established in their industries, and are almost never likely to end up in a disastrous situation. Dividend stocks pay out profits now, allowing you to live off your income without worrying too much about daily fluctuations in value. Over time, a well-curated portfolio of blue-chip stocks should also appreciate in price.
Popular blue-chip stocks paying stable dividends in 2024 include Coca-Cola, Procter & Gamble, Johnson & Johnson, Walmart, and JPMorgan Chase.
How balanced is your portfolio?
For the non-equity portion of your portfolio, you should choose a fixed income allocation that matches your income needs and risk tolerance. For example, if you have all the income you need and you only need bonds to ensure the safety of your account, you can buy low-yielding, high-quality investments such as short-term government bonds. If you are looking for a larger amount of income, you may need to accept a bit more risk. For example, long-term bonds and preferred stocks can increase your income, but their value fluctuates greatly with changes in market interest rates. High-yield mutual funds and ETFs can generate even more income through the use of leverage, but this also involves accepting more risk. Therefore, consult with a financial advisor to help you strike the right balance between risk and reward to meet your financial needs.
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This article originally appeared on GOBankingRates.com: How much should a 65-year-old invest in the stock market?
