As you approach retirement at 55, it’s important 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 still 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.
If you can’t wait long, a more defensive portfolio may be appropriate. But if growth is still necessary for your ideal retirement, taking some risks could be beneficial. Evaluate all of 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 how much risk is appropriate for your 401(k). Instead of making drastic moves, gradually shift to more conservative investments.
Navigating 401(k) strategies at 55
Some people use the rule of subtracting their age from 100 to determine the percentages of stocks and bonds in their portfolio. A 55-year-old, using this rule, would put 45% in stocks and 55% in bonds.
Adjustments can be made, such as using 110 or 120 instead of 100, to increase stock exposure if desired. Target date index funds offer a hands-off approach to manage your investments. These funds 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.
If you can comfortably live on these withdrawals, minimizing risk might make sense. However, keep in mind 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.