How to Invest at Every Age
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Most retirement experts and financial planners recommend workers save part of their annual income for retirement. How you save and invest in the decades before you leave a nine-to-five job impacts how you’ll spend your post-work years. Investment and trading decisions that work today may not work later. Asset allocation may need to change as they reach different life milestones and retirement age.
Key Takeaways
- Investing for retirement is important but the strategy may need to change as you age.
- Younger investors can tolerate more risk, but they often have less income to invest.
- Those near retirement may have more money to invest, but less time to recover from losses.
- Asset allocation by age plays a role in building a sound retirement strategy.
What Is Asset Allocation?
Individuals can invest in asset classes such as stocks (equities), bonds (fixed-income securities), cash and cash equivalents, commodities, real estate, futures, and other derivatives. Each asset class has a different level of risk and reward and behaves differently over time, depending on what’s happening in the overall economy and other factors.
When the economy is booming investors may move money into stocks. When the economy cools, investors may move their money out of stocks and seek the haven of the bond market or cash since stocks and bonds are negatively correlated.
Investing in a variety of asset classes provides diversification in a portfolio. That diversification keeps individuals from losing all their money if one asset class experiences loss. How investors arrange the assets in their portfolios is called asset allocation and typically looks different over a person’s life stages.
The 20s: Begin Investing
New graduates often begin a company 401(k) or an individual retirement account (IRA) and invest what they can. Employers commonly offer 401(k) matching contributions and deposit money to an employee’s 401(k) account to reflect contributions they’ve made.
The Internal Revenue Service (IRS) has an annual contribution limit for traditional and Roth IRAs which is $7,000 for 2024. For 401(k)s, the maximum amount individuals can contribute is $23,000 in 2024.
Young investors might choose an asset allocation of 80% to stock funds and 20% to bond funds because they have the advantage of time. Because of compound interest, investing during this decade reaps the most growth and time to absorb changes in the market.
A trusted financial advisor can help develop an investor’s risk profile. Alternatively, many online brokers have risk profile “calculators” and questionnaires that determine if an individual’s investing style is conservative or aggressive—or somewhere in between.
The 30s: Career-Focused
For those who haven’t started, the 30s are crucial to make a habit of putting money away. The rewards of compound interest are still there and investing 10% to 15% of income can be beneficial.
Although many may be paying for a mortgage or starting a family, contributing to retirement should be a priority. For those who can only save a little, it’s imperative to contribute enough to get any company match in a 401(k).
Many financial institutions offer target date funds that focus their asset allocation based on an individual’s estimated retirement year. The Fidelity Freedom Fund 2055 is one example that adjusts its investments from risky to less risky closer to the investor’s retirement.
The 40s: Retirement-Minded
According to available survey information, the typical household income for those between 45 and 54 years old was $101,500 in 2022. By this stage, investors must get serious about their retirement funds, commit to saving 15% of their annual income, and continue to max out contributions to their 401(k) and IRAs. Some financial advisors also recommend reducing or avoiding debt to have more money to save.
Those who are just starting may choose aggressive assets like stock funds to give their funds the best chance to grow. However, “aggressive” doesn’t mean “careless.” Stick with investments with a track record of producing returns and avoid deals that are “too good to be true.” Companies like Morningstar provide investors with ratings for funds they may invest in.
The 50s and 60s: Almost There
Those close to retirement may switch some of their investments from more aggressive stocks or funds to more stable, low-earning funds like bonds and money markets. Now is also the time to take note of all investments and estimate a timeline for retirement. Getting professional advice can help future retirees feel secure in choosing the right time to walk away.
The IRS allows those approaching retirement to put more of their income into investment accounts. Workers 50 and older can contribute an additional $7,500 per year to a 401(k)—called a catch-up contribution—for 2024. In other words, those aged 50 and over can add $30,500 ($23,000 + $7,500) to their 401(k) in 2024. For those with a traditional or Roth IRA, the 2024 contribution limit is $8,000 if 50 or older.
The 70s and 80s: Retirement
Retirees commonly shift focus from growth to income and stocks that provide dividend income or fixed-income bonds. Most individuals will also collect Social Security benefits and perhaps a company pension. When retirees turn 73 (for those born between 1951 and 1959) or 75 (for those born in 1960 or later), they will need to start taking required minimum distributions (RMD) from their retirement accounts.
Be sure to take RMDs on time since the IRS charges a 50% penalty on any amount that was not withdrawn. A Roth IRA doesn’t require RMDs and the account can continue to grow.Those who continue to work can contribute to an IRA if they have eligible earned income that doesn’t exceed the IRS income thresholds.
How Does Risk Affect an Investor’s Asset Allocation?
General recommendations for investment by age commonly do not consider each person’s specific circumstances or risk profile. Some investors are comfortable with a more aggressive investment approach, while others value stability. Life situations such as caring for an aging parent, funding a college education, or job losses, will affect the way and how much an individual can save.
How Much Should Individuals Keep In an Emergency Fund?
An emergency fund is a cash reserve for unplanned expenses or emergencies. Some advisors recommend at least 3-6 month’s worth of living expenses in a readily accessible place, such as a savings account, money market account, or liquid CD.
Does Everyone Qualify for Social Security When They Retire?
Workers must earn at least 40 Social Security credits to be eligible for Social Security benefits. Individuals earn credits when they work and pay Social Security taxes. The Social Security Administration uses the number of credits earned to determine eligibility for retirement or disability benefits, Medicare, and survivor benefits.
The Bottom Line
Investing for retirement is important at any age, but an individual’s strategy may change at various life stages. Asset allocation by age helps build a sound retirement investing strategy. Younger investors can tolerate more risk, but they often have less income to invest. Those near retirement may have more money to invest, but less time to recover from losses.
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