When we constuct a financial plan, age is often the largest consideration for the type and time horizon for your investments. Financial planning is a dynamic process that needs to be updated regularly based not just on age, but changes in income and your savings rate and anything else with important financial implications.
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 too far in the future to be a major focus. By 50, however, you’re starting to imagine a time when the career hustle won’t be a part of your life anymore and job income may go to little or nothing. As your life changes at different points in your life, a financial advisor who know you well will raise questions and considerations that you may not have thought of yourself.
A riskier investment at age 25 makes sense because solid investments will go up over time as long as you don't need it when the market is down. Even for investment mistakes, the younger you are, the more time you have to make up for the loss. By age 50 you may decide to pump the brakes, but that is a matter of degree. With a current life expectancy of 85 (and higher for upper-income people), focusing only on capital preservation may leave not have enough for later retirement. With a good finanical plan, finding the right balance between too much and too little risk relative to your age will clear to you.
Investing at Various Ages
Along with risk tolerance, your age is typically 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. That's why many choose to minimize risk and focus on more steady sources of income as they get closer to retirement.
Investing In Your 20s and 30s
With 30-plus years ahead of you before retirement, your intention might be to focus on growth over time. For those planning on retiring at least 30 years out (past your 50s), it’s common to have between 70 and 80 percent of your portfolio in stocks. If your goal is retiring early (age 50 or sooner), you might decide to lower the risk in your portfolio earlier than someone who plans to work well past 65. During your 20s and 30s, real estate and other alternate (e.g., neither stocks or bonds) should be looked at, and other common investment options include real estate, and the benefits of tax-deferred investments is so big that it's important to analyze the impact of putting away as much as possible in qualfied investment plans like IRAs for personal savings and 401K plans for work.
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 GRRSP, contributing the maximum amount now could create a promising payout through retirement. In general, how you invest in your forties will vary greatly depending on the types of investment options (if any) that 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 forties, with stock allocations sometimes 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 29.9 years, while women can expect an additional 34.1 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. With a well thought-out financial plan as your compass, you will have much greater 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.