Investment strategies should be fluid and change over time—what’s best for Gen Zers or Millennials isn’t even close to the same investment strategy for the millions of Baby Boomers nearing retirement age.
We’ll outline key strategies to adjust 401(k) asset allocations and better manage risk as you get older.
How To Save For Retirement
With home prices and cost of goods soaring in many parts of the country, it’s become harder than ever to reach financial retirement goals. That’s why it’s important to align your 401(k) investment allocations by age to ensure your average retirement savings meet your financial expectations when you punch the time clock that final time.
It’s also important to note that there are many different asset classes available to Rocket Dollar retirement investors. While company-sponsored IRAs allow for a limited menu of investment options in public markets, such as stocks, bonds, mutual funds or ETFs, Rocket Dollar retirement investors can participate in a much wider range of alternative asset classes using their Self-Directed Solo 401(k)s. These alternative asset classes include:
- Real estate
- Crowdfunding opportunities
- Startup equity
- Peer-to-peer loans
- Timber, precious metals and similar commodities
Perhaps the most important decision facing all retirement investors is asset allocation—and age and risk tolerance are huge determining factors in this crucial financial decision.
Strategic Asset Allocation by Age
There are countless ways to build a winning retirement portfolio, and portfolio construction can be slightly more complicated for Rocket Dollar self-directed retirement investors since they can create highly diversified portfolios through investments into alternative assets.
Perhaps the most common method used to determine 401(k) asset allocation by age is known as the “100 rule.” Using this theory, simply subtract your age from the number 100—that’s the percentage you should invest in public equities such as stocks. So Millennials just hitting age 30 should have as much as 70 percent of their retirement funds invested into the stock market. Younger retirement investors can adjust their 401(k) contribution by age upward according to their tolerance for risk. The thinking is that younger investors have more time to ride out cyclical market swings than older investors nearing or at retirement age.
As you age, you’ll begin decreasing the amount of 401(k) contribution invested into public markets and move it into historically safer assets such as bonds, mutual funds, and treasury bills. So by age 65, you’ll have just 35 percent (or less, depending on your appetite for risk at this point in your life) of your retirement funds invested into stocks. The main benefit of this strategy is that it reduces risk from market volatility as you near retirement age and preserves the capital you’ve worked so hard to build over the years.
Although this strategy has worked well for countless retirement investors, it doesn’t take into account the ability to create a 21st century diversified portfolio through alternative assets. Investments into real estate historically provide strong returns and appreciation over time and can provide supplemental rental income that can be used for additional investment opportunities. Likewise, early equity investments into startups carry greater risk but could prove highly rewarding if the business scales. And early investors into cryptocurrencies such as BitCoin, Ethereum and Ripple reaped millions in profits. The ability to diversify into assets with potentially attractive yields throws a curveball into the 100 rule for Rocket Dollar retirement investors.
Lastly, many retirement investors—especially those with company-sponsored 401(k) plans—are heavily invested in target-date funds. These funds are primarily used by traditional 401(k) plan custodians, especially for employees who fail to select investment choices when they establish their 401(k) plans. Target-date funds are structured to grow and reduce risk over time by using a glide-path approach that changes as participants near his or her target retirement date. In the early years, participants are heavily invested in growth-oriented stocks, while in later years they are strongly invested into more conservative investment options. This “set it and forget it” approach to retirement investing is not without its pros and cons. On the one hand, it can be good for unseasoned investors, but it may not be the best approach for seasoned Rocket Dollar retirement investors who want to unlock the full power of their Self-Directed Solo 401(k)s through alternative investments.
The Best Way to Save For Retirement
Regardless of how much of your retirement portfolio is in invested in public markets or alternatives, the key is to redistribute your 401(k) asset allocation by age to ensure you are minimizing risk. It’s worth examining every five years or so to ensure you are on track to have the proper amount needed to retire comfortably.
Learn more about Self‑Directed retirement plans with our ultimate guide.
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