This article will:

• Explain common rules for retirement investment
• Describe the reasons for higher or lower risk tolerance at different stages
  
• Help you understand when and how to modify your investment mix based on different needs at different times

There are certain investment and savings rules of thumb you may have followed as you began to plan for retirement. As you get closer to your goal retirement age however, strategies for smart saving and investing change. At the same time, you will begin to have a better idea about where you might be spending more significant amounts of money—whether purchases for enjoyment, investment, or necessity—and have a better understanding of risk and your changing tolerance for it.  Smart planning now will help you maintain the lifestyle you want through every stage. 

Retirement saving and investing often follows certain set rules or guidelines. Each is oriented to guide towards several outcomes: first, the accumulation of wealth through investments and assets; second the protection of those assets; and third, management of risk. While all of these are essential to everyone who is planning and saving for retirement, the ways, and times you might prioritize each, will change depending on your stage in life. 

401(k)s, IRAs and beyond 

When beginning to save for retirement you may typically have the option of defined-benefit plans like pensions or defined-contribution plans. Pensions these days are usually offered through public sector employment. Defined-contribution plans are more common and are frequently offered by employers via 401(k)s, 403(b)s and the like, or purchased independently via an IRA. 401(k) and 403(b)s are similar in many ways- both involve investing contributions in mutual funds oriented around a set level of risk– usually relatively low. These plans sometimes include the benefit of employers matching your contribution up to a certain amount. Yearly contributions are capped, but those contributions are exempt from taxes. Taxes will be paid upon withdrawal from the fund, however.

IRAs are a bit different. IRAs can be provided by employers (typically small ones) but more often are selected by people who are self-employed or do not have employer-offered plans. The term IRA can be used to refer to anything from a bank CD account to a more diverse mix of investments including stocks, bonds, and real estate. Like 401ks, contributions to IRAs are capped and they may also be tax-deferred, meaning you only pay taxes when you withdraw funds.  

The general rule of thumb is that you contribute to your 401k or other plan regularly, at the maximum level allowed, for as long as you can, starting as early as possible. While some 401ks include a mix of stocks and bonds that are selected for you, others will allow you to select the mix of investments included so that you can select between riskier stocks and less risky options such as bond funds, money market funds, or index funds. Traditional investing wisdom allows for those who are younger and with more time to save for retirement, the opportunity to take greater chances with investment. In general, your risk tolerance, or your willingness to risk losing an investment in exchange for the possibility of a larger return, will by necessity decrease over time. 

The 60/40 Rule

To balance risk and return, one common rule of thumb is to divide your investment portfolio on a 60/40 basis: 60% invested in stocks and 40% invested in bonds. Recent years’ market volatility has caused some to question the wisdom of that guideline, but most financial professionals agree that it still makes sense as a starting point for people who plan to keep their investments active for at least five years. Stocks are generally higher risk options than bonds, but can offer the possibility of greater returns. Bonds are more stable and along with cash or cash equivalents like CDs, money market accounts, or treasury bills are the most risk secure. Though they offer lower returns, they are often guaranteed by the federal government. CDs and money market deposit accounts are generally FDIC-insured up to $250,000 per depositor, per insured bank.

 
Your retirement savings account and any other investments you have in stocks or bonds are a major piece of your retirement assets. In addition, you might include any real estate holdings, private equity, precious metals, or other commodities. Each of these includes its own risks and it is always a good idea to enlist a financial professional to help you make sure your assets and investments include a mix that makes sense for where you are now, align with your risk tolerance and whatever your goals in retirement may be. With good guidance and thoughtful planning, you will be able to help protect your assets while also growing your savings for the future. 

Planning in your career years

Over your years of investing, building your career, growing your family, and increasing personal wealth, you will find that there are phases in which modifications might be made to your existing portfolio and plans. While in the thick of your career and earning years, you may choose to invest more heavily in one sector or investment—increasing your risk during a phase when you have more time to make up for any losses if they occur. In exchange for the increased risk allowed by more time, it is possibly these investments can lead to greater returns. In exchange for the increased risk allowed by more time, it is possibly these investments can lead to greater returns. At the same time, you will likely be focused on paying down debts, whether these are from education loans, private credit cards, or a mortgage. Generally, the closer you get to the age at which you want to retire, the more emphasis should be placed on paying down debt. If you have debts, paying down those with the highest interest rates first should be a priority.

Rebalancing

Along with paying down debts, you will likely have the chance to watch your investment portfolio change over time. Some categories of investment might have greater returns, while others may have greater losses. If you chose to invest in real estate for example that category may have brought significant returns, even as you may have experienced losses in your stock investments. When there is significant growth or loss in one category, or if you are facing a major life event or change, you may consider rebalancing your portfolio. This usually involves working with a financial professional to return your investment portfolio back to its original asset mix, one that aligns with your level of risk. Some professionals recommend rebalancing on a regular basis, while others focus on responding to specific life changes or needs, or when there are notable increases or decreases in certain asset classes. 

Even if you have followed the existing guidelines and rebalanced your portfolio as needed, as you get closer to your target retirement age there will likely be other changes to how you should think and plan. You will have greater clarity around your financial situation as a whole and a greater need to reduce risk. Once you are 59 ½ you will be eligible to begin withdrawing funds from your qualified 401(k) or IRA, though these will be taxed at the time of the distribution. Currently with the IRS distribution rules, you will be required to begin taking minimum distributions (usually quarterly or annually) by age 72. If you plan to continue working in retirement you might rollover an existing 401k to a new employer’s plan. As with all other tax questions, please discuss this with your CPA or tax professional. 

Another option for your 401k is to roll it over into an IRA. This could provide the potential for more variety in the types of investments you might choose from, and more options for withdrawal of funds. 

The Rule of 100, 110 or 120

One final rule of thumb to keep in mind as you consider your assets and investments and how their mix may change over time is what used to be commonly known as the Rule of 100, but is now more often called the Rule of 110 or 120. This rule originally stated that you should subtract your age from 100 and the resulting number should be the percentage you invest in stocks or other equity investments. So, if you’re 50 years old, 50% of your investments should be in stocks and 50% should be in low-risk assets. Changes in longevity though have led to many financial professionals advising this rule change to 110 or 120 to allow for longer lifespans. Given this advice you can see that the older you get it is a good idea to look at shifting the mix of your investments from higher risk categories to lower. The change from 100 to 110 or 120 does allow for greater risk at older ages than in the past, but should always be considered with the advice and guidance of a trusted financial professional. 

Now that you understand some of the considerations and reasons for shifting the balance of your financial plan over time, it is a good idea to do your own thinking about your plans and goals for retirement. With these in mind you can enlist a financial professional to offer guidance and advise you in the context of your current life and financial situation, investments, and when and how to adapt at each stage up to and through your retirement. 

While nothing guarantees a profit or protection against loss, no matter how appealing one stock or one company may seem, it is important to consider a broad array of investments and asset classes for your portfolio—and, of course, make sure your choices match your risk tolerance and time horizon. This information, which does not constitute investment advice, has been obtained from an outside source and is provided for your convenience by Equitable. Equitable and its affiliates and associates do not provide investment or market research. Equitable Advisors, LLC and its affiliates make no representation as to the accuracy or completeness of any statements, statistics, data, opinions, forecasts, or predictions provided herein. 

Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (Equitable Financial) (NY, NY), Equitable Financial Life Insurance Company of America (Equitable America), an AZ stock company with main administrative headquarters in Jersey City, NJ, and Equitable Distributors, LLC.  Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN).