You're likely reading this because of a desire to "make your money work for you", by taking advantage of compounding, professional management, diverse investment options, etc. From a financial planning perspective, however, some fundamental groundwork generally needs to be in place for investments to flourish:
- Never invest in something you don't understand.
- Risk management: (i.e. insurance for items that cannot be mitigated, or self-insured). If your house burns down, or the primary breadwinner dies without adequate insurance, all those invested dollars may need to be obligated to make you or your family whole again.
- High interest, unmanaged debt: It doesn't make sense to get a 12% return on investment while paying 24% on a credit card balance.
- Emergency Fund: liquid funds that cost little, or nothing to access in a hurry. Pandemics happen.
Your mindset and goals continually evolve over time. At age 25, you might be focused on paying off student loans and saving up for your first home. Your career is just getting started, and post-work years are well into the future. At 50, however, you’re starting to imagine a time when the career hustle won’t be a part of your life anymore — and neither will your usual income setup. Just as your life changes, your investment decisions may develop as well.
If you’re taking the same risky investment approach at age 50 as you did at 25, you may decide to pump the brakes. And for those who are conservative with decades left until your golden years, you could be leaving money on the table. As you move into new life chapters, it can be worthwhile to re-evaluate your investment decisions.
Investment Risks Over Time
Generally speaking, the younger you are, the riskier you may decide to make your investment portfolio. Earlier in life, many feel comfortable with a high-risk strategy because they won’t be withdrawing for years — they have time to recover and recoup from any losses from incidents such as a sudden market downturn.
Someone who's a few years away from retirement, however, won’t have as much time to recover from a plunge in the markets and may decide to maintain a low-risk strategy. If their portfolio relies too heavily on stocks, their entire retirement strategy could be jeopardized. They may not recoup their losses and could easily drain their other resources while trying to accommodate for this loss of income.
Investing At Various Ages
Along with risk tolerance, your age can also be an essential factor when deciding how much to invest and what types of vehicles to invest in. For example, the higher the percentage of stocks you invest in, the more volatile your portfolio may be. Many may choose to minimize risk and focus on more steady sources of income as they get closer to retirement.
Investing In Your 40s
As you’re inching closer to those peak earning years, your 40s can be an opportune time to double down on steadier investment options. If your employer offers contribution matches to 401(k) plans, contributing the maximum amount now could create a promising payout through retirement. At the very least, it makes sense to contribute at what your employer matches (that's an immediate return!) In general, how you invest in your 40s will vary greatly depending on the types of investment options (if any) were made in your younger years, how close you are to retiring and your risk tolerance. In general, most people begin shifting their asset allocation to a more conservative strategy in their 40s, with stock allocations closer to 60 or 70 percent.
Investing In Your 50s
How you choose to invest in your 50s will greatly depend on how your current financial picture aligns with your upcoming retirement goals. Take a look at your current income level, nest egg, taxes and projected retirement income. This could help you determine how aggressive your portfolio should remain throughout your 50s. Why? Because now’s the time to focus on creating income for you and your spouse throughout retirement. Depending on when you plan to retire, today’s 50-year-old man is expected to live an additional 31.9 years, while women can expect an additional 35.3 years.1 Incorporating an appropriate amount of risk into your portfolio can help you and your spouse prepare to experience the kind of retirement you want.
How you may decide to invest throughout your career can be based on a number of factors, but it’s always important to take your age and proximity to retirement into account. As you’re analyzing your portfolio’s asset allocation, diversifying and protecting your future retirement income is essential. Reflecting on your investment strategies can create peace of mind as you get closer to retirement age.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.