What Should Your 401(k) Be in if You Are Eight Years From Retirement?
When you are close to retirement, your investment needs are not the same as they were when you were many years away from retiring. If you have eight years to go, your investments should start to transition into safer securities that emphasize income over growth.
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Time Frame
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The investments that you should be in when you are eight years away from retirement have a lot do with how early you started saving for retirement. If you only started saving last year, you have to make up for lost time. This may lead you to put your money into growth mutual funds or growth stocks. If you have been investing faithfully for the last 40 years, then you can focus on maintaining your portfolio and creating an income.
Asset Allocation
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As you get closer to retirement, you can change the asset allocation of your portfolio to a more conservative approach. Asset allocation is the percentage of your portfolio that is invested in different asset classes. For example, you could invest a portion of your funds in stocks and a portion in bonds. One general rule of thumb that many retirement planners use is to take 120 and subtract your age from that figure. The number left over is how much of your portfolio should be allocated to stocks.
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Types
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As you get closer to retirement, you have several investment options to consider. Investing in bonds is popular because it provides you with relative safety and a regular interest payment. You can also invest in stocks that pay dividends as this is another source of income. Investing in bond mutual funds can also provide you with a regular income as well as diversification.
Transition
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Every year that you get closer to retirement, you have to transition your account toward a more conservative investment strategy. Each year, you may want to sell a portion of the stocks in your portfolio and use that money to buy bonds. This is called reallocating your portfolio and it is essential if you want to maintain your account balance and build a regular income.
Cash
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You may want to liquidate some of your holdings and keep some cash in your account. If you have been successful with your investing and saving, you could afford to liquidate some of your securities early. This is especially true if the market is doing very well and all of your securities are up in value. If you wait until you need the money, the value of the securities may be down and you could lose money when you cash them out.
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