This is the fourth episode of the Investing By Age series.
Your 50s are the time you have the highest earnings and ability to save, so it’s time to make the most of it.
Listen now and learn:
- How to take advantage of your peak earning years
- Ways to eliminate unnecessary investment risks
- Why you may need to update your retirement goals
- Two important reasons to rethink your asset allocation in your 50’s
Play the episode below or read the detailed show notes.
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RELATED CONTENT: Check out past episodes in this series for Investing in Your 20s, Investing in Your 30s, and Investing in your 40s. Investing for your 60’s and in retirement will be future episodes on our podcast page.
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Show Notes
People go through different financial stages at different ages, so you will likely find useful information in the episodes outside your age bracket.
If you’re in your late 20s, you might find the episode on investing in your 30s to be just as important. If you’re in your 50s, you might find that aspects of episodes on investing in your 40s and investing in your 60s are relevant.
I’m generally assuming that you have done the things suggested in prior episodes. With each episode, that in mind let’s dive into the essential aspects for investing in your 50s….
1. Take Advantage of Your Peak Earning Years
For many people, your 50s is when your earnings and ability to save are highest, so it’s time to start saving more.
That starts with making “catch up” contributions that allow you to put more money into your retirement accounts and reap higher rewards later.
Anyone age 50 or older can contribute an extra $1,000 to theirIRA (for a total max contribution of $7,000) and an extra $6,500 to your employer-sponsored retirement plans whether that’s a 401(k), 403(b), or 457 plan (for a total maximum contribution of $28,000).
If your employer has a SIMPLE 401(k) or SIMPLE IRA plan, then the catch-up contribution is $3,000 (so your max total contribution to those plans reaches $17,000).
For more retirement contribution limits, see 2023 Tax Numbers at a Glance.
On top of these catch-up contributions, you ought to consider adding bonuses, tax refunds, or other lump-sum payments to your retirement savings.
2. Eliminate Unnecessary Risk from Your Investments
When I review someone’s portfolio and balance sheet for the first time, I’m generally looking for unnecessary risk.
The most common example is individual stock exposure.
Most people don’t realize the risk that comes with investing in individual stocks.
I’ve written on this topic a few times before, which I will link to in the show notes, but it’s simply a matter of probabilities. Looking at historical rolling annual returns, individual stocks trail the median S&P 500 return 75% of the time.
Even worse, JP Morgan found that 40% of companies that were ever in the Russell 3000 experienced a permanent 70% decline in price from peak levels.
Most portfolios I see with individual stocks either have 10-30 stocks that each separately make up a small percentage of the portfolio. Most people employing such a strategy view it through the lens of diversification, but given the probabilities working against individual stocks, I’m not sure that it justifies it. The same applies to sector-specific or thematic ETFs.
I’d say now is the time to begin diversifying away from these individual stock positions in a tax-neutral manner. To avoid paying a big tax bill, this might take some time, which is why it’s important to start in your 50s rather than later.
If you want to carve out some small portion of your portfolio, say 5% or less, to speculate on individual stocks, then truly separate out those holdings into a different account.
Now, when I say something like “5% of your allocation,” I don’t mean a static allocation. If this portion of your portfolio shrinks over time due to losses or relative underperformance vs a diversified portfolio, I’m not suggesting you add funds to bring that account back up to 5% of your portfolio. As you approach retirement, it’s important that this type of activity is capped since history tells us that you’re about twice as likely to go broke as you are to hit it big.
A related unnecessary risk to address is concentrated stock positions.
This typically is the result of inherited positions or equity compensation packages.
In the case of concentrated positions as a result of equity compensation, most employees think they have unique information or insight into the prospects of their company’s stock, but I assure you the analysts and fund managers covering your company stock know more about it than you.
I’ve watched too many people have their financial plans destroyed by large decline in their company stock price, so please take this warning seriously. It’s important to diversify out of your equity compensation. After all, there is a reason your employer calls it “compensation” and not “investment.”
There are lots of other reasons besides equity compensation that lead to concentrated stock positions. Regardless of the reason you have concentrated positions, diversifying out of these positions without paying a massive tax bill will take a decent amount of time. Again, all the more reason to start now.
There are a variety of strategies from utilizing Separately Managed Accounts (SMAs) that focus on generating capital losses to using structured notes that offer downside protection and/or provide liquidity. The latter involves much more complicated strategies such as equity collars or variable prepaid forwards, so I’d encourage you to engage a financial advisor that has experience in this area.
One final risk that I’ll highlight here for investors is the lack of proper diversification.
Even though people sometimes own multiple U.S. mutual funds or ETFs, it’s not uncommon to see people omit an entire segment of the U.S. market whether it’s mid cap, small cap, value, etc.
More recently, I’ve also noticed a lot more people being significantly underweight International and Emerging Markets, or excluding them all together.
Fixed income is a bit more nuanced. The biggest issues I see in this part of the portfolio has to do with yield seeking behavior that leads to a less diversified and riskier set of exposures within the part of the portfolio that is supposed to be emphasizing safety.
3. Update Your Retirement Goals
In the prior Episode (Investing in Your 40s), the first action item was to test the viability of your retirement plan. And Episode 54 is all about determining how much you need to retire, so that might be an episode worth revisiting.
The big difference with this exercise in your 50s as opposed to ten years ago is that you probably have a better idea of what retirement looks like from a timing and cost perspective.
According to Investopedia, a majority of people believe that their annual spending during retirement will be 70% to 80% of their past expenditures.
However, you must also factor in expected (and unexpected) expenses that may occur. You might decide you want to travel more aggressively or buy nicer new cars more frequently in the early years of your retirement. Or maybe you anticipate paying for your kids’ weddings.
Now is a good time to make a list of all your planned costs so you can build those expenditures into your budget.
I also find that people tend to generally underestimate the cost and length of their retirement. As you fine-tune your retirement plan, keep in mind that people are living longer and it’s safer to plan on funding a retirement that lasts into your 90s.
You also shouldn’t forget inflation, which has historically averaged 3% a year. At 3% a year, the value of your dollars will be cut in half about every 24 years. And that’s just basic inflation. Healthcare costs are projected to rise even faster.
Updating your retirement goals is actually a nice segway into the next action item:
4. Rethink Your Asset Allocation
In case you aren’t familiar, asset allocation is an investment strategy used to balance risk and reward by allotting a portfolio’s assets to a mix of stocks, bonds, cash, and other assets according to an individual’s goals and risk tolerance.
A famous paper published 1986 determined that asset allocation explains 93.6% of variation in portfolio returns. Although, I must point out that this study as well as more recent versions of it that yield similar results assume you don’t attempt to time the market or try to beat the market through security selection.
Your portfolio will always rise and fall with the overall market. But the mix of stocks, bonds, and cash in your portfolio will dictate the range of possible outcomes and your long-term investing experience.
Historically, the more stocks you own, the riskier your portfolio is in the form of higher volatility and a wider range of potential outcomes. In exchange for this higher risk is higher potential long-term returns.
Bonds serve to dampen portfolio volatility, so owning more bonds means sacrificing potential long-term returns in exchange for lesser volatility.
Your asset allocation isn’t something you ought to change that often, but there are two primary reasons that I believe your 50s represent one of the best times to make an adjustment.
The first reason has to do with your willingness to tolerate risk.
Assuming that you’ve been investing your entire working career, people in their 50s have been through seven or eight bear markets. At this point, you should have a decent idea of how well you tolerate downturns.
It’s possible that your portfolio is overly conservative given your experience with risk. Or maybe you’ve learned that you experience anxiety over the even smaller, more frequent 10% market drops.
Thinking through how you’ve felt and, perhaps more importantly, how you’ve behaved in past downturns can better inform you on whether your portfolio is aligned with your willingness to tolerate risk.
The second reason it might make sense to revisit your asset allocation is your goals.
For most people, the primary goal for their investments is funding retirement. And as I just mentioned in the prior step of updating your retirement goals, you should have more visibility on your retirement horizon and expenses than you did in your 20s, 30s, and 40s when you likely had an aggressive asset allocation.
Because you can more clearly define what retirement looks like in your 50s, it’s possible that your asset allocation is no longer aligned with your goals. Perhaps the aggressive asset allocation of your 20s, 30s, and 40s is no longer necessary given how you now picture retirement. Or maybe you are retiring early and within the next few years, so it makes sense to dial down the stock exposure.
This brings me to the final item of Investing in Your 50s…
5. Get the Most Out of Professional Advice
As I’ve mentioned in prior episodes, perhaps the most important step you can take before your retirement is meeting with a financial advisor.
Would you argue a serious case about a legal document in a court of law without an attorney? Would you opt to have surgery from someone who wasn’t trained as a medical professional with expertise in your specific area of concern?
Of course not. And if you follow the same logic, working with a good financial advisor can improve your chances of financial success. Not only will a good financial advisor optimize your ability to manage your money, he or she can save you boatloads of time and stress.
Financial advice isn’t cheap – and that’s for good reason.
If you’ve made the commitment to invest in yourself by assembling a professional team around you, it’s worth taking the time to ask: are you getting more value than the price you’re paying? And are there things your advisor might be missing?
Here are five questions that can make sure your financial advisor is not only someone you can fully trust but also someone who’s doing the most for you.
- Will you put your fiduciary commitment in writing?
- Will you run a tax projection?
- Will you review my estate planning documents?
- How do you get paid?
- What is your succession plan?
Asking these questions of your advisor helps ensure that you’re taking full advantage of all the value a financial professional might offer. It might also shed some light on whether you are working with someone that truly offers comprehensive financial planning. After all, why pay for financial advice if you aren’t getting comprehensive advice.
If you don’t use an advisor today, then get my resource, “How to Interview A Financial Advisor”
I’ve developed a resource that I’ll share in the show notes to help you interview prospective advisors and identify the right one for you.
The important elements of investing in your 50s are:
- Take advantage of your peak earnings years
- Eliminate unnecessary risk for your investments
- Update your retirement goals
- Revisit your asset allocation
- Ask meaningful questions of your advisor to ensure you are getting appropriate value and care
In our next episode, we will look at Investing in your 60s.
Until then, to long-term investing!
Resources
- The Most Important Decision A Long-Term Investor Makes: Asset Allocation
- Is Now the Time to Buy Individual Stocks?
- EP 58: Investing in Your 40s
- Where to Save for Retirement: 6 Important Accounts
- 2022 Tax Numbers At A Glance
- EP 54: How Much Money Do You Need to Retire?
- Free Resource: “How to Interview A Financial Advisor“
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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