People invest for all sorts of reasons. You may invest with your child’s higher education or a large future purchase in mind. You may invest to ward off unexpected medical expenses or job loss. Or, if you’re like the majority of Americans, you invest to create the necessary wealth to get them to and through retirement. The “traditional” approach to retirement goes something like this:
- You work hard for a long time
- You invest in your retirement accounts
- At some point between 50 and 70 years of age, you hang up the cleats and live off your portfolio income and social security/pension payments
That’s the retirement model that we will assume for the purposes of this article. There are ways to retire younger than 50, but they usually involve buying or being awarded a ton of employee stock or building a wildly successful business. The point of this article is to give you an idea of what your retirement savings and investments should look like at each decade of your life. Keep in mind that individual circumstances may vary. This piece is merely meant to be a guidepost.
Investing in your 20’s
Your twenties are some of the more interesting, topsy-turvy times in your life. In the beginning, you’re getting through college or your very early career. Toward the middle and end, most people already have a family or are seriously considering having one. Though you may not be in your peak earning years yet, that shouldn’t stop you from investing in your future. There’s another unique aspect of your twenties that will never come around again, at least not years-wise: your risk capacity is quite high. This means that you can take on an increased amount of financial risk without ruining your entire retirement plan. Statistically speaking, this is the time to be the most aggressive in your retirement strategies if you’re saving to retire in two decades rather than four. (Aggressive means owning more stocks than bonds and cash). The main place this group should save and invest their money is in their 401(k)s and/r IRAs.
Investing in your 30’s
At this stage of your life, you’re still considered a “young adult,” or at least a younger adult. Hopefully, you’ve gained some job or business experience by this point. Chances are that your income has gone up, but you may also have more liabilities on your balance sheet – mortgages, car payments, etc. It’s still a time to be aggressive with your asset allocation (investment mix), if a bit more selective in your options. At this point, you may have children and a more solid idea of where your career is headed. After ten years, hopefully, you have a good base saved, which will begin compounding with more growth. The focus in your 30s is to continue to build your principal while accumulating as many assets as you can.
Investing in your 40’s
Okay, now you’re a “real” adult. You have two decades of working and/or business experience (in theory, anyway). Hopefully, you’ve been diligent in maintaining and expanding your investment portfolio over the years and now have a nice chunk of change in your accounts. Depending on your preferences, you may have most of your assets in retirement accounts, or you may have a mix of taxable and retirement assets. This is a critical juncture in your investing life. You’re more than likely not able to afford taking on excess risk at this point – this is where risk-tolerance needs to be sharp. If you’ve accumulated enough, you may be working with a financial advisor. If not, it’s wise to take steps toward properly caring for the assets that you’ve worked hard to acquire.
Investing in your 50’s
Turning 50 may mark the “finish line” for some, but for others, it’s a time to be decisively clear on what you want to accomplish with your retirement savings. This is a time to pin down the answers to questions such as:
- When do I want to retire?
- Where do I want to live?
- How much income will I need to live comfortably?
At this stage of your career, you’ve hopefully amassed at least several years’ worth of your annual retirement income need. Asset positional is very important in this stage, as you want to make sure distributions are done in a tax-efficient manner. If you’re still 10+ years away from the finish line, it’s a time to proceed with caution. A balanced, moderate-risk allocation may be most suitable at this stage of life. A higher-risk profile may not be wise if you’re in the ballpark of your retirement goal – or your retirement years.
Investing in your 60’s and Beyond
Assuming you took the “Traditional Route” and were wise and diligent in your investments, this is the finish line. At this point, withdrawals from your retirement accounts are no longer subject to early withdrawal penalties. (If you have a Roth account, make sure the “5 Year Rule” is satisfied). Your allocation is likely compromised primarily of bonds and cash/money markets. It is generally advisable to maintain some exposure to stocks in order to offset inflation risk. The goal at this stage and beyond is to avoid heavy losses wherever possible. Statistically speaking, early losses can be more devastating than later losses, as income generation is now primarily sourced through portfolio returns. You want to make sure your nest egg is positioned to provide you with substantial income for the rest of your life. It’s critical that you plan your budget and investments around factors such as inflation, healthcare, etc. Not to be dark, but this is also a time to make sure that all of your estate planning is up to date, including among others:
There’s nothing wrong with the “traditional” method of retiring. It’s worth noting that many people who retire at 60 miss having a primary function in their life and go back to work (and/or volunteer) part-time. Others may have to rely on a secondary income to make ends meet. Retirement looks different for each individual based on life choices and personal preferences. The rules of thumb such as “start early” and “invest often” are pretty handy when it comes to retirement planning. There are several important things to note at any point in your investment career, however, including:
- The market specifically and economy at large will experience ups and downs outside your purview
- The key to surviving market volatility is to stick to strategies that yield the highest successes at minimal risk at each stage of your life
- Each stage is unique, so the strategy you choose now may not be the ideal strategy to shoot for later
Most of all, at every point, know where you stand financially, and where you have potential to grow. Keep informed on the market and your status within it and make wise decisions based around your long-term goals.