Should You Invest More Aggressively To Retire Soon?

January 18, 2018

Are you getting close to retirement but feel like you’re behind on your retirement savings? Have you considered investing more aggressively to catch up? This is a question I’ve gotten a few times on our Financial Helpline (and is probably a sign that the market is getting closer to a peak).

Let’s take a look at the pros and cons

The main advantage is that a more aggressive portfolio is likely to perform better than a more conservative one over time. However, there’s also a risk of a significant market decline, especially when prices are as high as they are now relative to earnings. Earning a slightly higher return for a few years may not make much of a difference in your retirement readiness, but a big loss can mean having to delay retirement, withdraw less income, or face the risk of depleting your retirement savings. That’s why it’s generally recommended to be more conservative as you get closer to retirement.

The exception to the rule

However, there’s almost always an exception to every general rule. The biggest would be if you’re planning to retire early. If your aggressive investments perform well in the next few years, it can make that happen sooner. If they don’t, you can always retire a little later and probably with more assets in the long run. You can also split your investments into more moderate ones for retiring later and more aggressive ones for retiring earlier.

How I do it

For example, I’ve divided my retirement savings into “normal retirement” and “early retirement.” My normal retirement savings are moderately aggressively invested in my 401(k), HSA, and Roth IRA. I just need a modest rate of return in those accounts to reach my “normal” retirement goals.

Two timelines, two strategies

My early retirement investments are much more aggressively invested in my regular taxable accounts. If they do really well, I can retire earlier and don’t have to worry about early withdrawal penalties on that money. If they perform poorly, I can take the losses off of my taxes.

On the other hand, if I was approaching a normal retirement date and was just looking to catch up, I probably wouldn’t take that risk. Instead, I’d try to save more, reduce my retirement expenses, or consider other retirement income sources like an income annuity, a reverse mortgage, or even a part-time job or business. As always, it all depends on your situation.

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