It is important to tweak your investment goals and decisions with changing times. After all, you continue to evolve through every stage of life, personally and professionally. You should also ensure your financial evolution by changing your investment strategy as you go through life’s different stages.
As you grow older, you will need to think about what you want to include and avoid in your investment portfolio. You don’t need to be an investment expert to realize that taking the same investment approach at age 60 as you did in your 30s can be extremely risky. At the same time, you don’t want to miss out on lucrative investment opportunities and end up leaving money on the table.
It is important to remember that your age greatly affects your investment decisions. Let’s learn more about this.
How Age Affects Investments
When it comes to investing wisely, you can consider a number of asset classes, such as stocks, bonds, commodities, real estate, and so on. Each class behaves differently under varying economic conditions. Apart from the overall economy, the investor’s age has a huge impact on recovering from the risks associated with each asset class.
Depending on your specific circumstances, retirement goals, and risk profile, you can start building your portfolio at any age. Typically, the younger you are, the bigger risks you can afford to take. This is because you will have plenty of time to recover from any potential losses resulting from a recession or a sudden market plunge.
Investors nearing retirement, on the other hand, don’t have the kind of time it takes to bounce back from the effects of economic downturns. In fact, if your portfolio was stock-heavy, your entire retirement plan can end in ruin. This means never recovering from losses, and draining other monetary resources in accommodating the loss.
Priorities Change with Age
One of the main reasons why your investment strategy should change with age is because your priorities will change too. If you invest heavily in stocks all the time, for example, you will end up with a highly volatile portfolio. As a general rule, you should tone down the risk element and opt for more secure sources of income as you approach your retirement.
Investing in Your 20s
You may think you are too young to start investing in your 20s, but you need to change that mindset. After all, the early bird gets the worm! Even if you’ve recently graduated and are still paying off student loans, you should put some money aside for investment, however, small the amount.
By investing early, you’ll have the huge advantage of time being on your side. Going by the rules of compound interest, your investments in this decade can bring your lucrative returns. Also, when you are young, you have that much more time to adjust to market changes. Hence, you can focus on more aggressive growth stocks. Other common investment options include employer 401(k) plans and/or IRAs and even real estate.
Investing in Your 30s
Even if you missed investing in your 20s, it’s not too late. Your 30s are a good time to start investing as you’re young enough to take advantage of compound interest while being old enough to set around 15% of your income aside for investing.
Whether you’re paying a mortgage on your home or starting a family, you cannot overlook retirement planning. Fortunately, you still have 30 to 35 earning years ahead of you, so you should consider maximizing that contribution.
Putting enough in your 401(k) to match your company and even maxing it out is a good idea. This applies to IRAs too. You can also consider investing in real estate at this stage if you haven’t already. Since your risk tolerance will decrease now, consider bonds as a safe option.
Investing in Your 40s
At 40, it is time to get serious about investing. At this stage, you’ve likely peaked your earning potential. You should now start focusing on retirement savings. Meet with your local financial advisor for the best results as they will know which national and state-level schemes you can benefit from. So, if you live in Florida, consult a Florida financial advisor to know which funds to choose.
Consider saving in aggressive assets, like stocks, to stand a good chance against inflation. However, this does not mean you make careless decisions. Go with investments that are known to provide realistic and healthy returns. Further, keep contributing to your 401(k) and IRAs.
Investing in Your 50s and 60s
As you near your retirement, you need to become conservative in your investments since you cannot afford big risks anymore. Depending on the time left until retirement, choosing more stable investments is a good idea, even if it is low-earning funds like bonds and money markets. This is also a good time to avail of professional advice to build an optimal portfolio.
You can also take advantage of catch-up contributions. For 2020-21, the IRS has raised the limit by $500 to $6,500 from $6,000, allowing you to set aside a total of $26,000 in a 401(k). When it comes to IRA, the annual contribution limit for 2020-21 is $7,000 for those aged 50 or older.
Your Retirement and Investment
Life in your 70s and beyond should be worry-free if you’ve taken the above steps. However, just because you’ve retired and received Social Security retirement benefits (and possibly a pension), doesn’t mean should cash all your stocks. In fact, you should focus on stocks that generate dividend income and enhance your bond holdings.
If you’re taking required minimum distributions (RMD) from your retirement accounts, make sure to take them on time to avoid penalties. If you’re still working, you won’t owe RMDs on the 401(k) at your workplace. Also, thanks to the SECURE Act, you can continue to contribute to an IRA if you meet the eligibility criteria.
Investment decisions are complex since they are based on a number of variables. To bring some certainty and control over your finances, you should take your current age and retirement goals into consideration. It is also a good idea to avoid putting all your eggs in the same basket and build a diversified portfolio.
This will help you protect your retirement savings/income from ill-timed market slumps. Making well-timed and informed financial decisions will spare you money troubles, bringing you peace of mind now and in the future.