Investing in Your 50s (Rewind) (EP.130)

0:28We all need to make smart decisions with our money. but maybe you haven't heard before. So I'd love for you to check it out. And don't forget, if you're enjoying the podcast, the best way to say thank you is to leave a quick review or forward an episode to a friend. Now, let's get into this popular episode from my Investing by Age series.

0:50This is the fourth episode of the Investing by Age series. People go through different financial stages at different ages, so you'll likely find useful information in the episodes outside your age bracket. If you're in your late 20s, you might find the episode on investing in your 30s to be just as important. And if you're in your 50s, you might find the aspects of the episodes on investing in your 40s and investing in your 60s are relevant. I'm generally assuming that you've done the things suggested in prior episodes. So with that in mind, let's dive into the essential aspects for investing in your 50s.

1:28Number one, take advantage of your peak earning years. For many people, your 50s is when your earnings and ability to save are highest, so it's time to start saving more. That starts with making catch-up contributions that allow you to put more money into your retirement accounts and reap higher rewards later. Anyone age 50 or older can contribute an extra$1 ,000 to their IRA for a total max contribution of$7 ,000 and an extra$6 ,500 to your employer-sponsored retirement plans, whether that's a 401k, 403b, or 457 plan. And that brings your total maximum contribution to those types of plans to$28 ,000.

2:14Now, if your employer has a simple 401k or a simple IRA plan, then the catch-up contribution is$3 ,000. So your max total contribution to those plans reaches$17 ,000. In the show notes, I'll include a link to a resource I have for the 2022 tax numbers at a quick glance that gives you an idea of where these different contribution limits are based on your situation. On top of these catch-up contributions, you really ought to be considering adding bonuses, tax refunds, and other lump sum payments to your retirement savings. Number two, eliminate unnecessary risk from your investments. When I review someone's portfolio and balance sheet for the first time, I'm generally looking for unnecessary risk.

3:02Perhaps the most common example of this is individual stock exposure. Most people don't realize the risk that comes with investing in individual stocks. I've written on this topic a few times before, which I'll be sure to link in the show notes, but it's simply a matter of probabilities. Looking at historical rolling annual returns, individual stocks trail the median S &P 500 return 75 % of the time. Even worse, JP Morgan has a study that finds that 40 % of companies that were ever in the Russell 3000 experienced a permanent 70 % decline in price from peak levels. Most portfolios I see with individual stocks have somewhere between 10 and 30 stocks that each separately make up a small percentage of the portfolio.

3:54Now, I think most people employing such a strategy view it through the lens of diversification, but given the probabilities working against individual stocks, I'm not sure that justifies it. The same applies to sector-specific or thematic ETFs. Now that you're in your 50s, this is the time to begin diversifying away from these individual stock positions in a tax-neutral manner. To avoid paying a big tax bill, this might take some time, which is why it's important to start in your 50s rather than later. If you want to carve out some small portion of your portfolio, say 5 % or less, to speculate on individual stocks, then do truly separate those holdings out into a different account.

4:41Now, when I say something like 5 % of your allocation, I don't mean a static allocation. If this portion of your portfolio shrinks over time due to losses or relative underperformance versus a more diversified approach, I'm not suggesting that you add funds to bring that account back up to 5 % of your portfolio. As you approach retirement, it's really important that this type of activity is capped since history tells us that you're about twice as likely to go broke as you are to hit it big. A related unnecessary risk to address are concentrated stock positions. Now, these are typically the result of inherited positions or equity compensation packages.

5:23In the case of concentrated positions that result from equity compensation, most employees think they have unique information or insight into the prospects of their company's stock, but I assure you that the analysts and fund managers covering your company's stock know more about it than you. I've watched too many people have their financial plans destroyed by a large decline in their company's stock price, so please take this warning seriously. It's important to diversify out of your equity compensation. After all, there's a reason your employer calls it compensation and not investment. Of course, there are lots of other reasons besides equity compensation that lead to concentrated stock positions.

6:08Regardless of the reason that you have a concentrated position, diversifying out of these positions without paying a massive tax bill is going to take a decent amount of time. Again, all the more reason to start now. There are a variety of strategies from utilizing separately managed accounts, also known as SMAs, that focus on generating capital losses or using structured notes that offer downside protection and or provide liquidity. Now, the latter involves much more complicated strategies, such as equity collars or variable prepaid forwards. So I encourage you to engage a financial advisor that has experience in this area.

6:49One final risk that I'll highlight here for investors is the lack of proper diversification. Even though people sometimes own multiple U.S. mutual funds or ETFs, it's not uncommon that I'll see people omit an entire segment of the U.S. market, whether it's mid-cap, small-cap value, et cetera. More recently, I've also noticed a lot more people being significantly underweight international and emerging markets or excluding them altogether. Now, on fixed income, it's a bit more nuanced the biggest issues I see in this part of the portfolio often has to do with yield-seeking behavior that leads to a less diversified and riskier set of exposures within the part of the portfolio that is supposed to be emphasizing safety.

7:37Moving on to number three, update your retirement goals. In the prior episode, Investing in Your 40s, the first action item was to test the viability of your retirement plan. And in episode 54, that was all about determining how much you need to retire. So that actually might be another episode worth revisiting. The big difference with this exercise in your 50s, as opposed to 10 years ago, is that you probably have a better idea of what retirement looks like from a timing and cost perspective. According to Investopedia, a majority of people believe that their annual spending during retirement will be 70-80 % of their past expenditures.

8:19However, you also have to factor in the expected and unexpected expenses that might occur. You might decide that you want to travel more aggressively or buy nicer new cars more frequently in the early years of your retirement. Or maybe you anticipate paying for your kids' weddings. Now is a good time to make a list of all your planned costs so that you can build those expenditures into your budget. I also find that people tend to generally underestimate the cost and length of their retirement. So as you're fine-tuning your retirement plan, keep in mind that people are living longer and it's safer to plan on funding a retirement that lasts into your 90s.

9:02You also shouldn't forget inflation, which has historically averaged 3 % a year. And at 3 % a year, the value of your dollars will be cut in half about every 24 years. And that's just basic inflation. Healthcare costs are projected to rise even faster. Updating your retirement goals is actually a nice segue into this next item, which is number four, rethink your asset allocation. In case you aren't familiar, there. Asset allocation is an investment strategy used to balance risk and reward by allotting a portfolio's assets to a mix of stocks, bonds, cash, and other assets according to an individual's goals and risk tolerance.

9:46There's a famous paper that was published in 1986 that I'll link to in the show notes that determined that asset allocation explains 93.6 % of variation in portfolio returns. Although I must point out that this study, as well as more recent versions of it that yield a similar result, assume that you don't attempt to time the market or try to beat the market through security selection. Now, your portfolio with a balanced asset allocation is always going to rise and fall with the overall market. But the mix of stocks, bonds, and cash in your portfolio will dictate the range of possible outcomes and your long-term investing experience.

10:28Historically, the more stocks you own, the riskier your portfolio is in the form of higher volatility and a wider range of potential outcomes. In exchange for this higher risk is higher potential long-term returns. Bonds serve to dampen portfolio volatility. So owning more bonds means sacrificing potential long-term returns in exchange for lesser volatility. Now, your asset allocation is not something that you ought to be changing all that often, but there are two primary reasons that I believe your 50s represent one of the best times to make an adjustment. The first has to do with your willingness to tolerate risk.

11:11Assuming that you've been investing your entire working career, people in their 50s have lived through either seven or eight bear markets. So at this point, you should have a decent idea of how well you tolerate downturns. It's possible that your portfolio is overly conservative given your experience with risk. Or maybe you've learned that you experience anxiety over the even smaller, more frequent 10 % market drops. Thinking through how you've felt and perhaps more importantly, how you've behaved in past downturns can better inform you on whether your portfolio is aligned with your willingness to tolerate risk.

11:52The second reason it might make sense to revisit your asset allocation is your goals. For most people, the primary goal for their investments is funding retirement. And as I just mentioned in the prior step of updating your retirement goals, you should have more visibility on your retirement horizon and expenses than you did in your 20s, 30s, and 40s when you likely had an aggressive asset allocation. Because you can more clearly define what retirement looks like in your 50s, it's possible that your asset allocation is no longer aligned with your goals. Perhaps the aggressive asset allocation of your 20s, 30s, and 40s is no longer necessary given how you now picture retirement.

12:35Or maybe you're retiring early and within the next few years, so it makes sense to dial down the stock exposure. This brings me to the final item of investing in your 50s. Number five, get the most out of professional advice. As I've mentioned in prior episodes, perhaps the most important step you can take before your retirement is meeting with a financial advisor. Would you argue a serious case about a legal document in a court of law without an attorney? Or would you opt to have surgery from someone who wasn't trained as a medical professional with expertise in your specific area of concern?

13:15Of course not. And if you follow the same logic, working with a good financial advisor can improve your chances of financial success. Not only will a good financial advisor optimize your ability to manage your money, he or she can save you boatloads of time and stress. Now, financial advice isn't cheap, and that is for good reason. But if you've made the commitment to invest in yourself by assembling a professional team around you, it's worth taking the time to ask, are you getting more value than the price you're paying? And are there things your advisor might be missing? With that in mind, here are some questions that can make sure your financial advisor is not only someone you can fully trust, but someone who's doing the most for you.

14:05And if you want to dive deeper into these different questions and why they are important, I will link to an article in the show notes that does exactly that at thelongterminvestor.com. So here are the five questions I think you should ask your advisor. Number one, will you put your fiduciary commitment in writing? Number two, will you run a tax projection? Number three, will you review my estate planning documents? And by the way, on these last two, I don't mean outsource that to somebody else. Will you actually do the work internally yourself? Do you have the expertise internally to do these things?

14:42Number four, how do you get paid? And number five, what is your succession plan? Asking these questions of your advisor helps ensure that you're taking full advantage of all the value a financial professional might offer. It might also shed some light on whether you're working with someone that truly offers comprehensive financial planning. After all, why pay for financial advice if you aren't getting comprehensive advice? And if you don't use an advisor today, I've developed a resource that I'll share in the show notes that helps you interview prospective advisors and identify the right one for you.

15:21So to recap the important elements of investing in your 50s, take advantage of your peak earning years, eliminate unnecessary risk from your investments, update your retirement goals, revisit your asset allocation, and ask meaningful questions of your advisor to ensure you're getting appropriate value and care. In our next episode, we're going to be diving into investing in your 60s, but until then, to long-term investing.

15:55Thanks for listening to the Long-Term Investor podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.