The passage of time feels like it creeps, then pounces: Suddenly, party conversation focuses on real estate, how we’re going to bed earlier and our realization that we have no idea what type of jeans to wear. For years, millennials have been the butt of financial jokes: “They spend all their money on lattes and avocado toast!” and “Why don’t they get a minimum wage job to pay for college like I did?” But the clichés got old quickly.
And now, as millennials move deeper into their 30s and 40s, there are some things to consider changing up. Most notably, our investments.
YOUR PORTFOLIO MIGHT NEED TO CHILL
For those lucky enough to invest early on, the advice was pretty standard: Invest often, and invest in aggressive assets to take advantage of long-term growth. The target-date funds (those that automatically rebalance your portfolio as you get older) held in 401(k)s were typically calibrated to higher-risk investments. Maybe the most aggressive of us dipped our toes in crypto and meme stocks at some point. After all, you’ve got all the time in the world to ride out the highs and lows of the market when you’re 24.
But now, we’re more mature. And with that wisdom comes new responsibilities, like adjusting our asset allocation. Asset allocation is just a fancy phrase for what percentage of your portfolio is in each investment. For example, a 20-year-old’s investment portfolio of $100 (for easy math), might be 90% in stocks and 10% in bonds, or $90 and $10, respectively. As you get closer to retirement, it’s a good rule of thumb to shift that allocation to a less risky position, such as 60% stocks and 40% bonds, though the exact percentages will depend on your personal financial situation.
“In general, as we get older we tend to take fewer risks,” says Aaron Hatch, a certified financial planner and founder of Woven Capital in Redding, Calif. “In your early 20s, when you have nothing to lose and time on your side, you can afford to take all kinds of risks. However, as we millennials accumulate assets in our 401(k)s and elsewhere, and we inch toward retirement, it might be worth considering taking a little risk off the table by slightly decreasing exposure to stocks or other risky investments.”
SHIFTING STRATEGIES
One easy way to figure out if it’s time to shift your asset allocation is to look at model portfolios. Some brokerages will show examples of what their target-date funds look like for different timelines to retirement. You can consider these illustrations and adjust yours accordingly.
For example, if you’re 30 and you’re planning to retire when you are 65, you could check out portfolios that show what a target-date fund looks like for those retiring in 2060. You may see a majority of stock-based funds with about 10% in bonds. If you’re in your 40s, that recommended portfolio may be closer to 15% in bonds.
Model portfolios can be helpful, but they aren’t perfect. Maybe you own a chunk of crypto or some real estate. These kinds of investments should be considered when shifting your assets, and it can help to get a second opinion. Some financial advisors will meet with you as needed to give your portfolio a checkup.
“When developing a tax-efficient withdrawal strategy and systematic withdrawals from your accounts, this is truly where working with a financial planner can save you thousands,” says Marigny deMauriac, a CFP and founder of deMAURIAC, a financial planning firm in New Orleans. “We understand the tax implications of withdrawals and can help you coordinate withdrawals with Social Security benefits and other sources of income to optimize your retirement.”
WHAT HAPPENS NOW MATTERS IN RETIREMENT
When you’re shifting your asset allocation now, it pays to think strategically about your future.
“The types of accounts an individual has when they retire, along with their cash needs, should determine their withdrawal strategy in retirement. Because 401(k)s and Rollover IRA withdrawals are taxed as income, it is important to keep taxes in mind when deciding from which account types to pull money for living expenses in retirement,” Hatch says.
Think ahead to retirement. When you sell your investments so you can have spending money in retirement, you’ll likely have to pay capital gains tax on those earnings— unless you invested within a Roth 401(k) or IRA account and the taxes were already paid. But if you know you’ll need to pay taxes on that money, it’s worth calculating what you’ll owe and setting it aside.
And according to deMauriac, you may still need to be invested throughout retirement.
“Since you might live to be in your 90s, chances are, you can’t just shift everything to cash and call it a day,” deMauriac says. “Most people need to plan for growth in their accounts to outpace inflation, even in retirement.”
Asset allocation, like many of the chores of millennial middle age, may not feel glamorous, but it may help us pay for all that avocado toast we’ll enjoy in retirement.
