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A guide to investment strategies for every stage of life

Throughout our lives, our priorities, income and expenditures may change, sometimes drastically. Similarly, how you are investing at 25 should look much different from your investment strategy at 55. When it comes to investing, two of the biggest factors at play as we age are how much we may be able to invest and how much risk we can tolerate.

Investment Basics: Asset Allocation

Investments are generally categorized into different asset classes, each with its own levels of risk and reward. Investment strategies are typically composed of a combination of different asset types to create a diversified strategy with the goal of hedging risk.

The basic types of assets include:

  • Stocks
  • Bonds
  • Cash and cash equivalents
  • Alternatives (commodities, real estate, derivatives)

Ideal and recommended asset allocations vary by an investor’s age and time left until retirement – the younger you are, the more risk your portfolio may be able to tolerate, but each investor will have to decide what is best for them.

Below we break down commonly recommended investment strategies for each age group. However, bear in mind that these are general guidelines, and you should consult your financial advisor to create an individualized plan that takes into account your own specific circumstances and investment goals.

Based on savings recommendations by T. Rowe Price

Your 20s: Begin Investing

While many young adults embarking on their career may not have much cash to spare with student loans and low starting salaries, they do have one thing on their side – time. Because of the compounding effect, your investments during this period may have higher growth potential. Even if you can only contribute $50 or $100 a month to a retirement account, it may likely be worth more than the money you invest later on in life. Investing young also means that you may be able to absorb any potential losses over time.

If your employer offers 401(k) matches, try to contribute to the maximum amount of the match – it is literally “free money” that you are receiving. For individuals who do not have employer-sponsored plans, individual retirement accounts (IRAs) are a good alternative. Roth 401(k)s and IRAs may be worth considering for younger investors as well. Unlike traditional 401(k)s and IRAs, you will not receive a deduction on your taxable income, but distributions in retirement are tax free. Because younger investors may be in a lower tax bracket, it may be more beneficial to pay taxes right away instead of taking a deduction.

Your 30s: Make Investing a Priority

If you spent your 20s avoiding investing for whatever reason, your 30s are when you have to start taking things more seriously. You still have 30 or 40 years left before retirement and compounding will be able to work its magic. At this stage you are most likely earning more so you may want to consider investing between 10 and 15% of your income and maximizing your 401(k) and/or IRA contributions. If contributing the maximum to your retirement accounts is still out of reach, gradually increase your contributions each year (many plans have this as an automated setting you can select).

As far as asset allocation, you may consider riskier assets, but also gradually start increasing some of your allocation to bonds, as well.

Your 40s: Closing the Investment Gap

For those individuals that spent their youth thinking retirement was some far distant future that was a worry for “tomorrow,” their 40s may suddenly hit them as that “tomorrow.” If you haven’t saved for retirement until your 40s or finally began earning more discretionary income, this decade should be used to fill any gaps. Consider meeting with a financial advisor to help create a catch-up plan that balances various assets and strategies that may help make up for lost potential earnings.

If you have been diligent about saving, your 40s are a time where you may hit your highest earning potential and are ideal for continuing to build a solid investment portfolio and maximizing 401(k)s and IRAs.

Your 50s and 60s: On the Brink of Retirement

With retirement around the corner, it may be time to pump the breaks on riskier assets and allocate more of your portfolio towards stable and lower return assets like bonds. The closer you are to retirement, the safer you want to be with your money. 

If you are still working on closing the gap between what you have saved and what you will need in retirement, maximum contributions after the age of 50 increase for both 401(k)s and IRAs. For 2021, the contribution limit for 401(k)s is $26,000 ($19,500 base + $6,500 of allowed catch-up); for IRAs it’s $7,000 ($6,000 base + $1,000 of allowed catch-up).

Your 70s and 80s: Spending Your Investments

At this stage, the focus likely shifts from saving for retirement to spending during retirement. Depending on your circumstances, you may want to delay your social security benefits until age 70 in order to receive a delayed retirement credit which increases your benefits 8% for every year between your full retirement age and age 70.

For 401(k) plans and IRAs, you must begin taking distributions at age 72 (70 ½ if you were born before July 1, 1949). Be sure to take out required minimum distributions on time, because there is a 50% penalty on funds you don’t withdraw when required. Roth IRAs do not require withdrawals and can be passed on to beneficiaries after your death.

If you are still employed, you can continue contributing to the 401(k) at the company you’re employed at and won’t have to take distributions. You can also continue to contribute to an IRA indefinitely if you have eligible earned income (note that you still must take distributions at age 72 or 70 ½, depending on your date of birth).

When it comes to your allocations, you may want to leave some money in stocks, especially those that provide dividends. You may also consider investing in real estate investment trusts (REITs), if you haven’t done so already, as they typically provide a source of potentially stable dividend payments. Many investors also choose to allocate to assets that may be considered “safer,” like bonds during this period.

To Wrap It Up

As you age and navigate through the various stages of life, your investments should move and change with you. No matter where you currently are in your journey, it’s imperative to assess how you are doing with your retirement savings. As always, meet with a trusted financial professional to determine what investments are best for you and your goals.

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