The Investing Mistake Almost Everyone Makes in Their 60s

You may have heard the generic advice to invest in riskier funds when young, and get more conservative as you near retirement. While this mantra can work for some, it comes with some caveats. This instinct to be more responsible may cause you to miss out on precious years of growth.

And if timed incorrectly, it can even cause some seniors to run out of funds during retirement. The good news is that simply by knowing about it, adjusting for your personal timeline, and making some shifts, you can avoid this costly mistake for your retirement plan. Here's a better approach that balances risk without jeopardizing your nest egg.

Why going "too safe, too soon" can backfire

It's natural to have a fear of losing money right before or during retirement. After all, many of us have seen what happens when a company like Enron leaves vulnerable investors high and dry. While this is an extreme example, it drives some of the desire to "lock in" what you've built and not risk any of it when you're about to stop working.

But a 60-year-old couple has a strong chance that one partner will live into their late 80s or even longer. Those investments then need to last 30 years or longer. As inflation erodes purchasing power over time, the most conservative investments may not keep up to sustain that older partner.

The math most investors overlook

The reality is that retirement isn't the end of investing; it's actually the beginning. While your approach can shift, the math rewards continued investment as you age.

Let's assume a monthly contribution of $500 for 40 years, assuming continued investing over a long horizon (including retirement years). In two scenarios, you'll see:

• Conservative returns (4%): Around $570,000 earned
• Aggressive returns (8%): Around $1.5 million earned

That $1 million gap gives you flexibility to live more like your pre-retirement lifestyle with wiggle room for rising health care costs and inflation protection. Lower returns reduce wealth and often fail to cover the gap left by the average $2,000-a-month Social Security benefit.

The other costly mistakes people make in their 60s

Other risky behaviors that feel safe, but aren't, include:

Panic-selling during a downturn. This behavior locks the value of your investment into the loss. You'll miss any recovery and may experience more damage than the loss itself.

Ignoring expense ratios. A small 1% fee eats away at long-term returns. Fees also compound just like returns do, but in reverse.

Failing to rebalance. After a bull market, your portfolio may be too stock-heavy. After a downturn, you'll likely be too conservative. To avoid too-high risks or locking in losses, give your investments a proper calibration with the help of a financial advisor, if necessary.

The sequence-of-returns risk

Another thing to be aware of is the sequence-of-returns risk, which may matter more than the average return once withdrawals begin.

The concept works like this: Two portfolios with the same average returns can produce very different outcomes, depending on the timing of the losses.

Losses early in retirement, combined with withdrawals, make it more difficult to recover. This leads people to become overly conservative. Then, they reduce stock exposure too much, which diminishes their earnings and eventually, the size of their nest egg.

While sequence risk does matter, eliminating growth doesn't fix the problem.

A smarter way to balance growth and safety

A cash cushion of 1-2 years of living expenses in addition to an equity portfolio can help you resist the temptation to get too conservative, even in the face of market drops. With this healthy buffer, you won't feel you have to hastily sell and can wait for markets to recover.

If you're unsure of your risk tolerance or need help deciding equity exposure, a fee-only planner can be a good ally in the process. They may recommend bonds for stability and income, but not as a full replacement for riskier, high-growth equities. Be sure you clearly communicate your financial priorities and non-negotiables (keeping your home or avoiding some investments) so they can tailor advice to your values.

Bottom line

Despite what your gut may be telling you, taking too much risk isn't the worst possible option. It's actually taking too little risk too early in retirement. 

If you or your spouse plan on living a long life, you'll need continued investments and growth to outpace your expenses and inflation. This typically requires continued market exposure alongside income sources like Social Security.

A balanced strategy combining stocks, a cash cushion, and rebalancing manages growth and risk. And by choosing the right growth-oriented portfolio, you can offset the impact of both risk and mandatory withdrawals from required minimum distributions (RMDs) over time. Staying invested with a thoughtful strategy helps you avoid financial mistakes and gives your money the best chance to last as long as you do.

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