When it comes to retirement, Jim Cramer always says the best way to make money grow is to do so slowly and with prudence, but too much caution is a bad thing.
Conventional wisdom teaches that investors need to lessen as much risk as possible when investing retirement money.
Cramer disagreed and said a little risk in stocks with higher returns will ensure a wealthy retirement.
"When you, either in your 401(k) or your IRA or just your discretionary investing account, put money into things like Treasury bonds or stable value funds, you're effectively taking that money off the table. You're saying, this money — I'm not going to use it to generate more wealth, I just want to keep it safe," the "Mad Money" host said.
When you are managing your money, there's a point where all of your prudence becomes recklessness, and this is something you particularly see with people who want to save for retirement.Jim Cramer
Simply put, Cramer thinks that if investors load up on bonds in their 20s, 30s or 40s, there will not be enough money generated to retire comfortably.
"I know retirement money is meant to be sacrosanct with little risk taken, but it's possible in this era of very low interest rates, to be too cautious, too prudent and too risk averse." Cramer said. "When you are managing your money, there's a point where all of your prudence becomes recklessness, and this is something you particularly see with people who want to save for retirement."
Cramer's rule to remember when selecting bond allocations is to go by age. Here are his recommendations for bonds, by order of age:
- Younger than 30: No reason at all to own bonds
- In your 30s: 10 to 20 percent of your portfolio
- In your 40s: 20 to 30 percent of your portfolio
- In your 50s: 30 to 40 percent of your portfolio
- 60 to retirement: 40 to 50 percent of your portfolio
- After retirement: Own some stocks, especially high yielding stocks that can generate more income with less risk, approximately one-third of your portfolio
Some may think that Cramer's guide is very aggressive because it is counterintuitive to what investors have always been taught. However, people are living longer these days, and bonds simply just won't cut it.
If you want to provide for yourself as you grow older, the upside to stocks will take you there when the money from bonds runs out.
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