A recently conducted analysis by Fidelity Investments found that many of those close to reaching retirement age are dangerously overextended on stocks in their investment portfolios. Having a large portion of your investments in stocks increases your vulnerability during market downturns. Those close to retirement age may not have time to recover their losses from the downturn before it is time for them to retire.
Most experts recommend that your investment portfolio become more conservative as you get closer to your target retirement date. Target date funds from retirement account providers can do this automatically for you. Using your target retirement date as a guide, these funds reallocate your assets over time to decrease the risk in your portfolio as you get closer to retirement.
If you do not have access to a target date fund, you will have to reallocate your assets yourself to ensure you are not assuming too much risk close to your retirement date. With workplace retirement plans, this can typically be accomplished without incurring expensive fees. However, some private brokers charge a number of fees to clients that are selling stocks and buying more conservative investments. To prevent unpleasant surprises, make sure you take a look at what fees will be charged on the transactions before you make them.
If you are having difficulty figuring out how your funds should be allocated to different types of investments, here is a good rule of thumb from Money Talks News founder Stacy Johnson:
Subtract your age from 100 and put that percentage of your long-term savings into a stock index fund. Take the remainder of your long-term savings and put half into a bond mutual fund and the other half in an interest-bearing savings account. This will limit your exposure to volatile stocks while still providing you with an attractive return on your investments.
