By the time you reach your 50s, you may already be contemplating retirement. Your overriding concern may be: When can I afford to retire?
Hopefully, by this time, you’ve already accumulated significant savings both within and outside your retirement plan.
This is a good time to evaluate your investments and set yourself up for a successful retirement.
Avoiding these three investment mistakes is a good start.
Mistakes to Avoid When Investing in Your 50s
Mistake #1: Not focusing on asset allocation
“Asset allocation” refers to the division of your investment portfolio between stocks, bonds and cash.
The financial media fills the airways with pundits touting stocks to buy or sell, predicting the direction of the market or trying to identify the next “hot” actively managed mutual fund.
Rarely is asset allocation the subject of discussion, although (according to Vanguard) “it has the biggest effect on the way your portfolio will act.”
How important is your asset allocation?
If you are properly diversified, 88% of your investment experience (the volatility of your portfolio and the returns you earn) are a direct function of how your assets are allocated.
Asset allocation isn’t a “one size fits all” exercise. It’s often a function of how much risk you need to take and can tolerate. As a general rule, stocks are more risky that low risk bonds (like Treasury bills, notes and bonds).
In exchange for accepting the higher risk in stocks, investors have historically been rewarded with higher returns over the long-term.
When investing in your 50s, you may be nervous about the short-term volatility of stocks. Striking a balance between your stock and bond holdings is especially critical for these investors.
According to Personal Capital, investors in their 50s keep approximately 50% of their funds in a mix of domestic and international stocks.
Don’t make the mistake of over or underweighting your portfolio in stocks. Not having enough stocks may reduce your returns. Having too large a percentage of stocks may subject you to short term volatility and losses.
Your asset allocation isn’t static. It should be revisited periodically. As you age, your wealth advisor may recommend moving a greater percentage of your assets into more conservative investments.
Mistake #2: Ignoring costs
Perhaps the biggest mistake investors make is not understanding the impact of costs on returns.
According to Morningstar, there is a “clear relationship” between fees and performance of mutual funds, but that correlation may not be what you expect.
Mutual funds with low fees tend to outperform those with higher fees. Funds with higher fees are “unlikely to offer above-average performance.
Index funds, exchange traded funds and passively managed funds generally have lower fees than actively managed funds (where the fund manager attempts to beat the returns of a risk adjusted benchmark). When you incur higher fees of actively managed mutual funds, you reduce your returns. These higher fees are also the reason why many actively managed funds underperform comparable index funds.
Don’t make the mistake of buying more expensive actively managed mutual funds in the mistaken belief paying high fees is likely to generate outsized returns.
Remember this sage observation by Vanguard founder, John C. Bogle:
“In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”
Mistake #3: Ignoring catch-up contributions
As an investor in your 50s, you benefit from special “catch-up” provisions that permit you to exceed contribution limits on retirement plans applicable to those under 50.
According to the IRS, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, was increased to $22,500 in 2023, up from $20,500 in 2022.
The limit on annual contributions to an IRA increased to $6,500 in 2023, up from $6,000 in 2022. The IRA catch-up contribution limit for individuals aged 50 remains at $1,000.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan was increased to $7,500 in 2023, up from $6,500 in 2022.
Consequently, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2023.
Catch-up contributions can play a critical role in helping you to make up for a late start with your retirement savings or simply boosting your retirement nest egg.
It’s a mistake not to take advantage of them.
As you contemplate your retirement, remember the biggest investment mistake you can make:
Not having a plan that sets forth a savings rate, ensures you are maximizing your retirement plan benefits, and establishes appropriate goals.