Too many retirement savers are scared to take risks and end up choosing investments that stifle how their money grows.
A new study argues that investors approaching retirement are more worried about losing money if their investments falter than boosting their bank balances.
Research by US bank Wells Fargo revealed that 60% of Americans were too concerned about protecting what they had in the bank rather than taking a risk to increase their balances.
Although the over 55s should look at derisking their investments to avoid a sudden market shock on the eve of retirement, the bank found much younger savers were unduly worried about staying in stocks to capitalise on investment opportunities.
Instead, they are looking at safer, low yield bonds.
Age appropriate action
Wells Fargo found that although safeguarding assets was considered a good move by 52% of over 60s, around 60% of 30, 40 and 50 year olds thought the same as well.
“It’s important that people allocate their investments in a way that’s appropriate for their age and risk tolerance,” said Joe Ready, head of Wells Fargo Institutional Retirement and Trust.
“This relatively conservative approach to investing among younger people may reflect an emotional reaction of day-to-day market volatility.
“However, it’s important not to have a knee-jerk reaction. It’s also important to make informed decisions about investing in a way that allows those with a long runway before retirement to use their biggest asset — time — to accelerate their savings growth potential.”
Right mix of investments
To prove the point, Ready explained what $10,000 invested in two different ways 40 years ago might look like today.
- A portfolio allocation of 70% stocks and 30% bonds would have grown to $581,295from January 1, 1976, through September 30, 2016.
- During the same time, $10,000 invested in 30% stocks and 70% bonds would have grown to $336,715.
“This simple example makes it clear that choosing the right mix of investments relative to your time horizon and risk tolerance is important when it comes to being well-prepared for retirement,” he said.
“In addition to saving enough, there are two key actions that can help position a person for success in retirement savings – start early and make sure you’re allocated according to an investment plan aligned with your goals, avoiding emotional reactions to market news and making intentional, informed decisions about investments in your retirement planning.”
