Outside of their home, a retirement account—a 401(k)—is usually the largest asset investors hold. When retirement is about 10 years away, investors generally take a keen interest and really start paying attention to their 401(k) and what they are invested in. While this is exactly what investors should be doing, they often make a critical mistake.

I often see investors who see the finish line and decide to ramp up their risk and start investing aggressively in Small-Cap or International funds. In my opinion, what they should be doing is becoming aggressive with their savings. Asset allocation will only take a portfolio so far. Saving aggressively is the key. At age 50 and older, investors can make catch-up contributions bringing their 401(k) contributions limit to $26,000 in 2021. This is a significant amount that can have a meaningful impact on your retirement balance. Add an employer matching contribution, and the last few years before retirement become extremely advantageous years to save.

I will always encourage those who are younger to start saving early. While young investors may only be able to afford to save 3% to 4% of their salary, they have the power of compounding on their side. Young investors generally have short-term priorities including homes, family, and education, which is why I encourage them to save at minimum enough to receive the full company match. As investors get older, I encourage them to increase their retirement savings as they make more money and have less need to save for short-term goals. While very few investors can afford to maximize their 401(k) contributions, the opportunity is available for those who started saving later.

When retirement is about 10 years away, instead of trying to juice the account balance by chasing returns, the better strategy is to save more aggressively. Investors may also want to diversify their savings between the traditional 401(k) and the Roth 401(k) option if it is available. I warn investors that a $1 million 401(k) is not worth $1 million—more like $620,000 after federal and state taxes, as withdrawals are taxed at ordinary income rates. Investing in the Roth 401(k) option gives investors a chance to let their funds grow with withdrawals being tax free after age 59 ½. If the company 401(k) plan does not offer a Roth option, investors should consider using a brokerage account. While withdrawals may incur capital gains, generally capital gains tax rates are more favorable.

As for asset allocation, investors who are approaching retirement generally need a financial plan to determine what will be the best mix for their situation. Quite often, the third-party adviser of the 401(k) plan will provide participant education and can help investors with planning. If an investor will draw upon these assets immediately upon retirement, I generally recommend they begin shifting the money needed to cover spending needs to bond funds offered within their plan. The reason is that this money should be protected from the volatility of the equity markets and to safeguard your purchasing power. Bond prices may fall under some market conditions, but they generally don’t fall as far or as often as stocks.

At this critical stage, target-date funds, which are extremely popular withing 401(k) plans, may not be the best choice. While they all generally have a bond component, investors need to consider their other assets to determine their most beneficial asset mix. A target-date fund may end up being too conservative for an investor’s situation, causing them to miss out on additional returns.

William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a Certified Financial Planner™ professional.

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