It’s never too late to start investing, but your strategy might change as you progress through different life stages. Two huge factors that change over the years are the time to retirement and income.
There are pluses and minuses at every stage: for example, in your 20s, you have a lot of time before the traditional retirement age of 65, but in your 40s, you will likely be earning more money toward retirement.
The key to success is making the most of your strengths and opportunities at each stage of life. Adapting your investment strategy can optimize your returns and mitigate risk.
Understanding Asset Allocation
Asset allocation is a process of dividing an investment portfolio among different assets, such as stocks, bonds, real estate, and cash. The idea is to balance risk vs. reward by adjusting the percentage of each asset in the portfolio.
Think of your investment portfolio like a garden. You wouldn’t plant only one type of flower but likely a variety. Asset allocation is like deciding which plants to grow—stocks, bonds, real estate—and what proportions. Diversification within each asset class is like planting different varieties of roses or tomatoes so that if one struggles, others thrive.
The idea is to pick a mix of asset classes that will get you to your goal in the time you want while exposing you to the level of risk that is appropriate for your situation.
Then, adjust your investment strategy or mix of assets as things change or you get closer to hitting your goal. It makes sense that age is a big factor in adapting your asset allocation at different stages of life.
Someone closer to retirement might prioritize preserving their capital, while someone in their 20s might focus on growth and take more risk. Still, factors influence your retirement strategy, including your financial goals, preferences, and risk tolerance.
Another thing to note is that age does not necessarily dictate retirement date. If you want to retire sooner than 65, you must invest more aggressively and save a higher percentage of your income.
Common Investment Vehicles
401(k)s, IRAs, HSAs, and individual brokerage accounts are some common investment vehicles. Think of these as the “where.”
Within those accounts, you invest in stocks, bonds, or different types of funds like mutual funds, target-date funds, money market funds, or ETFs. This is the “what” you are investing in.
Investing in Your 20s
If you start investing in your 20s, you’re in a great position to take advantage of a valuable asset: time. Starting early is the key to unlocking the full potential of compound interest.
Compound interest is a snowball effect in which interest is earned not only on your initial investment but also on the interest accumulated over time. Thanks to that time advantage, consistently contributing even small amounts in your 20s can really grow. You have time to weather market fluctuations, allowing your investments to recover and thrive.
To maximize your time-to-retirement advantage, save as much as possible each paycheck. Aim for 15% of your salary before taxes.
Typically, investors in this age range will allocate 90%-100% of their portfolios to equities such as stocks and 10% or less to bonds. This is reflected by the asset allocation in target-date funds that rebalance portfolios as investors get closer to retirement.
Investing in Your 30s
If your 20s are a time for growth and aggressive savings, your 30s are a time for balancing today and tomorrow. Many folks are balancing family, mortgage, and career with long-term financial goals during this decade. Saving and investing consistently is crucial.
Keep maximizing employer matches and automating contributions. Growth is still a priority, but increased financial responsibilities make balance more critical now. Investors in their 30s might keep their asset allocation from their 20s or add more bonds for additional stability.
Prioritize creating an emergency fund and consider life insurance to protect your family. Regularly review your portfolio to adapt to changing circumstances. Remember, your 30s are about building a resilient financial foundation.
Investing in Your 40s
Once you’re in your 40s, retirement is no longer a distant “someday” on the horizon, so it’s time to ramp up investing. This means maximizing contributions to retirement accounts.
If you have any outstanding high-interest debt, this is also a good decade to put extra toward reducing it. You want interest to grow in your investing accounts, not what you owe others. Your asset allocation should still lean toward growth, meaning around 80% in equities and the rest in bonds.
Regularly review and adjust your portfolio to align with your evolving retirement goal. Think of this decade as a time to solidify your retirement plan and take decisive action.
Investing in Your 50s
Once you’re in your 50s, the shift toward stability and concrete planning happens. There’s enough time to fine-tune your strategy and ensure a smooth transition into retirement.
The focus should be more on preserving capital and on moving toward more stable investments, such as bonds and dividend-paying stocks, to reduce volatility. That might mean investing around 60%-70% in equities and the rest in bonds.
This is also the time to actively plan your retirement lifestyle, including estimating expenses, determining withdrawal rates, and exploring health care options.
Investing in Your 60s and Beyond
Your 60s and beyond are about transitioning from accumulating wealth to generating income. You’ll want to focus on enjoying the fruits of your labor while maintaining financial security.
Shift your portfolio towards income-generating investments, such as bonds, dividend-paying stocks, and annuities. That might look like 40% in stocks and 60% in bonds, or a similar allocation.
It’s key to understand the implications of required minimum distributions (RMDs) from retirement accounts and strategize your withdrawals to minimize taxes. Now is the time to integrate Social Security benefits into your overall retirement income plan.
The focus is preserving capital, managing expenses like health care, and ensuring a comfortable and sustainable retirement lifestyle.
The Bottom Line
As your life evolves, so should your retirement planning and investing strategy. From aggressive growth in your 20s to asset preservation in your 60s, adapting your portfolio allocation is essential.
Note that these age-based guidelines are starting points. Your risk tolerance and goals will determine your most optimal approach, so regularly reviewing your portfolio and adjusting as you go is crucial for staying on track.
The closer you get to retiring, the more you’ll want to seek professional advice to help you navigate the complexities of taxes and health care planning and ensure a smooth transition.
