Are your retirement savings benefiting from asset allocation by age?

june 10, 2024

Are you assuming you don’t need to worry about retirement because you have a 401(k) plan where you work? Think again.

Many American workers don’t know what their plans are invested in, let alone whether that mix of investments is right for them right now. If you’re one of those people, you could be missing out on many thousands of dollars that could be part of your retirement nest egg.

Having a strategy for retirement savings is crucial to realizing your retirement goal. And a key factor in your investment strategy could be your age. That’s right, your current age. The ideal retirement investment strategy when you’re a young adult in your 20s or 30s likely isn’t the same strategy you might consider for your 40s or 50s, which is different yet again from the strategy that might be best for you as you approach, enter, and enjoy your retirement.

As you progress through your career and approach retirement, it’s crucial to optimize your 401(k)’s asset allocation by age to help ensure your is aligned with your tolerance for risk and is primed to work best for you. Here’s a look at how you might approach asset allocation by age: investment strategy is aligned with your tolerance for risk and is primed to work best for you. Here’s a look at how you might approach asset allocation by age:

In your 20s and 30s: Prioritize growth

When you're in your 20s and 30s, time is on your side. You can likely afford to take on more risk in pursuit of higher long-term returns. That’s because, with decades until you can retire, you typically have enough time to recoup any short-term losses through subsequent growth. As you age, you can gradually shift to more conservative investments that better preserve your capital but don’t necessarily provide the growth rates of more aggressive investments.

To implement this principle of asset allocation by age, you can adopt the “100 Rule.” This “rule” has you subtract your age from 100 to determine the percentage of your portfolio that should be allocated to stocks. For a 30-year-old, this would mean a 70% (100 - 30) stock allocation, with the remaining 30% in investments such as bonds, treasury bills, and money market funds.

To account for longer lifespans and the need to generate more retirement income to cover them, consider adjusting the “100 Rule” to the "110 Rule" or even the "120 Rule." Following one of these variations would enable you to consider more aggressive stock allocations in your 20s and 30s. 

In your 40s and 50s: Balance growth and stability

As you enter your 40s and 50s, it's time to examine shifting your 401(k) portfolio toward a more balanced approach. But it’s probably a good idea not to shift too much. You may still have 20 or more years to work before you retire, and you probably don’t want to lose a significant part of the growth potential of your savings. At this point in your life, you likely still want significant funds in stocks.

This may mean allocating around 60% or more of your portfolio to stocks, with the remainder in bonds and other fixed-income assets. It can also be helpful to take advantage of catch-up contributions. These generally allow people aged 50 and older to contribute an additional $7,500 per year to their 401(k) for 2024, on top of the standard $23,000 contribution limit. Maximizing these contributions can have a significant impact on your long-term retirement savings.1

In your 60s and beyond: Prioritize stability

As you near retirement, adjusting your asset allocation by age means it's likely time to shift your portfolio toward a more conservative asset allocation. Now is typically the time to reduce your exposure to higher-risk investments, such as stocks, and increase your allocation to relatively safer investments, such as bonds.

This shift helps to preserve the value of your nest egg, reduce the impact of market volatility on your retirement income, and increase the likelihood that you’ll have enough retirement income. The "100 Rule" suggests a 40% stock allocation for a 60-year-old, with the remaining 60% in bonds and other fixed-income assets. However, if you adopt the more aggressive 110 Rule or 120 Rule, you would keep somewhat more of your assets in stocks even as you near retirement.

Target-date funds put asset allocation by age on autopilot

If continually adjusting your asset allocation by age sounds like too much tinkering for you, consider a target-date fund. It’s a fund that makes these gradual tradeoffs between risk and reward for you. Think of it as the 100 Rule on autopilot. Good news: many 401(k) plans offer Target Date Funds, making them easy to adopt.2

However, not all Target Date Funds are alike. Different funds can have different sets of allocations, even when they’re targeted to a single age. Evaluate any fund you’re considering to confirm that it meets your tolerance for risk and your goals for retirement.

For help with all the questions that swirl around asset allocation by age, be sure to check in with your financial planning professional.

1. Judith Ward and Roger Young, “Retirement Savings by Age: What to Do With Your Portfolio in 2024,” T. Rowe Price Insights, February 23, 2024.

2. Troy Segal, “What Is a Target-Date Fund? Risk Tolerance and Example,” Investopedia, October 2, 2022.

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