When it comes to investing and saving for retirement, a fine line exists between minimizing risk and playing it too safe.
An October 2016 Wells Fargo survey found that 59 percent of workers are more focused on avoiding loss than maximizing the growth potential of their retirement assets. Dave Roda, regional chief investment officer for Wells Fargo Private Bank in Boca Raton, Florida, says that attitude could compromise the long-term retirement outlook of some savers.
“Our survey results suggest that many Americans have an investment strategy that’s too conservative for accumulating a sufficient retirement nest egg,” Roda says.
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Failing to achieve adequate growth could narrow the odds of being able to meet your retirement needs, says Roda, particularly when longer life expectancies and near record-low bond yields are factored in. Thirty-five percent of workers included in the survey said they felt they wouldn’t have enough money to stay afloat in their later years.
If you’ve taken the cautious route in building an investment portfolio for retirement so far, it may be necessary to rethink that approach. Making certain adjustments to your plan could mean the difference between a savings shortfall or a secure retirement.
Consider your time horizon. Time can be your best friend or your enemy, depending on how long you have to invest for retirement.
Steven Anzuoni, a retirement income certified professional and owner of Fairway Financial Insurance Agency in Boston, says the number of years left to maximize retirement savings has a significant impact on lifetime income planning.
“The reason most people tend to be conservative is fear of losing money,” Anzuoni says, which can detract from your savings goals. Being overly aggressive with less time to plan can be equally devastating.
Albert Brenner, director of asset allocation strategy at People’s United Wealth Management in Bridgeport, Connecticut, says investors must learn to deal with risk rather than attempting to avoid it altogether.
“An investor’s time frame is probably the most important factor in making portfolio adjustments because the longer someone has until retirement, the more risk he or she should be able to take on,” Brenner says.
Take a step back and consider how far off retirement is for you. Is there a wide enough time gap to allow for your portfolio to rebound in the event of a major market decline? If time is on your side, moving beyond your current comfort zone could increase the potential for higher returns over the long term, despite market fluctuations.
Check your savings rate. For some investors the real issue is not choosing too-conservative investments, but simply not saving enough for their retirement years.
Comparing how much you’re currently investing for retirement to your target savings number can help you map out an action plan for getting back on course says Chris Georgandellis, a chartered financial analyst and founder of Tree Town Investments in Ann Arbor, Michigan.
“If you’ve recognized that you’re not going to hit your goals, it’s important to try to determine the cause,” Georgandellis says. “If you can’t understand how you got to where you are, then you won’t be able to understand what you need to do next.”
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Georgandellis says that for some investors, a simple asset allocation change could be enough to correct a retirement portfolio that’s skewed off track. The key is to understand what you’re getting into when you move toward new investment territory.
Brandon Ross, managing director at United Capital in Dallas, says some investors may need to think beyond increasing their risk tolerance or savings rate to compensate for a smaller asset base.
“Those who aren’t saving enough for retirement need to look at extending employment, changing their lifestyle or reducing spending,” Ross says.
He recommends avoiding knee-jerk decisions and leaving emotions out of the investment equation. Ross says a certified financial planner can help you with creating a plan that meets your retirement objectives and accounts for economic, market and life changes that may occur along the way.
Be consistent. How frequently you’re investing for retirement can be just as important as how much you’re saving for the future.
In the Wells Fargo Survey, only 34 percent of workers said they were putting money aside for the future regularly. Those who’d been saving steadily since starting their careers had a median of $150,000 set aside for retirement, compared to a $20,000 median savings for those who were more sporadic in their efforts.
“Consistency is really important,” Ross says, not only in terms of how often you’re saving but what you’re investing in.
“Investors should use a consistent balance approach between stocks, bonds and cash, then tilt the risk based on what their objectives are,” he says.
Look at how much you’re investing in tax-advantaged retirement accounts outside of your employer’s plan, as well as taxable investment accounts. Then, consider how often you’re making those investments.
Investing $500 here or $1,000 there may seem like you’re making headway, but choosing to invest smaller amounts on a periodic basis could yield better results. Setting up automatic investments can make it easier to get on schedule.
Know where to draw the line. While being ultra-conservative with your investments can put a damper on your retirement outlook, swinging too far in the other direction can also be detrimental.
“People can get hurt financially by taking on too much risk that they’re not comfortable with,” Anzuoni says.
Trying to overcompensate and being too aggressive takes you outside the scope of your risk tolerance level, which may lead to unnecessary stress, says Anzuoni.
Brenner says investors should take care to avoid putting all their eggs in one basket when trying to move their portfolio away from being overly conservative. “The last thing an investor should do is try to hit a home run by making concentrated investments, whether they be in a single security or a single asset class,” he says.
Big bets can impoverish an investor and should be avoided, no matter how tempting they may be. Brenner says investors should also be careful about buying last year’s winners or funds that are ranked largely on their past performance alone. “Investors are buying the future, not the past,” he says, and investment decisions must be forward-looking.
Roda warns against giving into the urge to try and time the markets and encourages investors to focus instead on implementing a disciplined program of rebalancing. His most straightforward piece of advice is perhaps the most important.
[See: 10 Tips for Couples and Young Families to Build Wealth.]
“Don’t wait to act,” Roda says. “It’s never too late to improve your chances of meeting your retirement goals.”
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