Retirement investors generally choose more conservative investments as they age and their account balance increases. Conversely, the youngest investors and those will the smallest account balances generally select the riskiest investments, according to a recent Employee Benefit Research Institute analysis of 10.9 million IRA accounts. Here's a look at how people adjust their retirement investment strategy as they age:
Ages 25 to 34: People in this age range have a greater proportion of their IRA (71.3 percent) invested in equities—often via mutual funds and individual stocks—than any other age group. "They have the longest time until retirement, so they have the greatest ability to take advantage of the extra risk to get the anticipated higher returns from equities then you get from bonds," says Craig Copeland, a senior research associate at EBRI and author of the report. This is also the age group most likely to be invested in balanced funds such as lifecycle funds and target-date funds, with 26 percent of assets invested in these types of funds. Investors in their late 20s and early 30s have 5.6 percent of their IRA balance invested in bonds and 8.4 percent invested in money funds, including money market mutual funds and certificates of deposit.
Ages 35 to 44: Investors in their late 30s and early 40s continue to have a high equity allocation (69.4 percent), and 16.8 percent of their account balances are invested in balanced funds. They allocate slightly more to bonds (8.4 percent) than younger investors and 8.6 percent to cash investments.
Ages 45 to 54: Retirement savers in this age range have 63.4 percent of their nest egg in the stock market and 12.1 percent in the bond market. "I like buying bonds for people when they are in their 40s or 50s," says Bridget Sullivan Mermel, a certified financial planner for Sullivan Mermel in Chicago. "That allows them to feel more comfortable taking risk with the equity that is remaining." They have 13.3 percent of their IRA balance invested in balanced funds and 8.9 percent in money funds.
Ages 55 to 64: IRA owners over age 55 are much less likely to be invested in equities and balanced funds than those under age 55. People within 10 years of traditional retirement age have cut back their equity exposure to 52.2 percent of their account balances, and increased their bond allocation to 18.7 percent. They also have 10.8 percent of their assets in balanced funds and 9.1 percent in cash. "In my experience, their willingness to deal with the volatility of the stock market decreases as they get to within five years of retirement," says John Trott, a certified financial planner for Valeo Financial Advisors in Indianapolis. "That's when they are beginning to get close enough to understand that they don't have time to ride out another correction in the stock market. We tend to decrease the equity allocation and most of that shift goes into some form of fixed-income investments and bonds and bond mutual funds."
Ages 65 to 69: Investors further cut their equity allocation in the early years of retirement, with 46.2 percent still invested in the stock market. Those in their late 60s have 22.7 percent of their IRA accounts invested in bonds and 9.7 percent invested in money funds. "They are less likely to have extreme allocations than younger people," says Copeland.
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Age 70 and older: Investors age 70 and older have 45.3 percent of their IRA balances still in the stock market. Only a small portion of their assets (8.8 percent) are invested in balanced funds. Instead, retirees in this age range have a quarter (25.4 percent) of their account invested in bonds or bond funds. "Having some money in some conservative investments in your retirement makes a lot of sense," says Mermel. "When you are not earning money anymore, my recommendation is to put a portion of your savings in a CD ladder and a bond ladder."
Investment strategies also vary considerably based on the size of the IRA account balance. As account balances increase, the proportion of assets in equities and balanced funds decrease, and allocations to bonds and other types of assets increase. Here's a look at how investment allocation changes as account balances grow:
Less than $25,000 saved. People with less than $25,000 in their IRA account tend to invest it aggressively, with approximately 69 percent invested in equities. Balanced funds are also popular, especially among those with the least savings. For people with less than $10,000 invested in their IRA, 21 percent is in target-date or similar types of funds. Bond allocations are very low (6.9 percent) for people with less than $10,000 saved and 10.1 percent for those with account balances between $10,000 and $24,999. Investors with small balances can make significant progress by boosting their savings rate. "The primary goal as income increases should be to increase the percentage of salary that is being saved," says Trott. "Even though income is increasing, it's extremely important to make sure that they continue to monitor their spending."
$25,000 to $99,999 saved. People with between $25,000 and $49,999 in their IRA continue to have a large allocation to equities (65.2 percent), but that amount drops to 59.8 percent for people with $50,000 to $99,999. The latter group has a higher bond allocation (15.2 percent).
$100,000 to $249,999 saved. The allocation to equities declines as retirement savers accumulate bigger account balances. People with between $100,000 and $149,999 in their IRAs have 55.7 percent of their account balance invested in the stock market, which declines to 52.4 percent among those with $150,000 to $249,999 saved.
$250,000 or more saved. People with $250,000 or more saved for retirement have the most diversified portfolios. They have the smallest proportion (45.7 percent) of their IRA account allocated to equities and the largest proportion invested in bonds (24.2 percent). Relatively affluent retirement savers are the least likely to use balanced funds (7.7 percent). They also have 9.2 percent of their account balance invested in money funds, including money market mutual funds and certificates of deposit. "They are maintaining their balances instead of growing their balances like those who are younger and those with smaller balances," says Copeland.