As you approach retirement at 55, it’s essential to consider what to do with your 401(k). You’ve done a good job saving over the years, but now you want to reduce risk while growing your portfolio enough to support a 4% annual withdrawal. The first step is to assess your risk tolerance.
Some investors are comfortable with high-risk investments like cryptocurrencies, while others prefer safer options like high-yield savings accounts. Review your mutual funds or ETFs to see which ones align with your risk tolerance. Consider how long you can wait for your portfolio to recover from a market correction.
A more defensive portfolio may be appropriate if you can’t wait long. But if growth is still necessary for your ideal retirement, taking some risks could be beneficial. Evaluate your financial assets, not just your 401(k).
This includes whether your house is paid off, the size of your brokerage portfolio, and any other accounts. These details help determine the appropriate risk for your 401(k). Instead of making drastic moves, gradually shift to more conservative investments.
Navigating 401(k) strategies at 55
Some people subtract their age from 100 to determine the percentages of stocks and bonds in their portfolios. For example, a 55-year-old using this rule would put 45% in stocks and 55% in bonds.
Adjustments, such as using 110 or 120 instead of 100, can be made to increase stock exposure if desired. Target-date index funds offer a hands-off approach to managing investments. Theyds become more conservative as the target retirement date approaches.
For instance, the Vanguard Target Retirement 2050 Fund adjusts its asset allocation to become more conservative as 2050 nears. If you prefer less risk, choose a fund with an earlier target date. One critical question is whether a 4% annual withdrawal from your 401(k) will cover your living expenses.
Minimizing risk might make sense if you can comfortably live on these withdrawals. However, remember that the cost of living tends to increase over time. Remaining invested in stocks a bit longer may offer a better financial cushion.
Preparing for retirement is complex and involves assessing your risk tolerance, reviewing your investments, and considering your entire financial picture. Consulting with a financial advisor can provide personalized guidance tailored to your specific needs.