Financial planning is a lifelong endeavor, but people often seek out investment advice that doesn’t fit their current stage in life. When it comes to saving for retirement, most Americans invest and manage those savings for six decades or longer. It’s important to consider how your resources and risk tolerance change as you move through different life stages. Saving for your retirement looks very different at age 30 compared to age 60. As financial advisors, we strive to help our clients develop retirement savings plans that are appropriate to the changing circumstances they face at every age. Here are some areas that we consider when giving age-appropriate retirement advice.
Ideal Asset Allocation by Age
In the past, investment experts advocated the “100 Rule,” which called for subtracting your age from 100 to determine how much of your assets should be invested in stocks. For example, this rule called for 25-year olds to hold 75% of assets in stocks or “riskier” investments and 25% in bonds, CDs, equities or other low-risk investments. Now, this has been updated to the “110 or 120 Rule” because Americans are living longer, making it extremely important to generate enough money to last throughout retirement. While this rule is useful for general guidance, it’s important to look at your particular situation and develop a more nuanced investment mix that is more closely aligned with your retirement savings goals and risk comfort level.
In Your 20s: Balance Saving and Investing
Your earning ability is at its lowest in your 20s, but the power of compound interest makes this decade the best time to invest. Many professionals recommend that people in their 20s invest a majority of their retirement savings in stocks rather than bonds or savings accounts. A 2016 investment analysis by NerdWallet found that a 25-year old with a $40,456 salary who invested 15% a year exclusively in the stock market would likely end up with as much as $3.3 million more than if they kept their money in savings accounts. Regardless of how you invest your retirement savings, you should strive to balance your approach with paying off outstanding debt (student loans, credit cards) and saving for an emergency fund.
In Your 30s: Invest Aggressively in Stocks
Take full advantage of your employer’s contribution by investing 10 to 15% of your salary in your office retirement plan in your 30s. Investing in a home or rental property is a good idea, provided you will be able to keep the real estate for at least five years. When you compare long-term investment returns on stocks and bonds, stocks vastly outperform cash and bond investments over time. You have decades to potentially make up any temporary losses in the stock market, so invest as aggressively in equities as your risk comfort level allows.
In your 40s: Maximize Your Retirement Contributions
By the time you reach your 40s, you need to be saving as much as possible for your retirement. Now is the time to max out your retirement contributions by investing the full $18,000 allowed each year. Investing in a tax-advantaged Roth IRA in addition to your 401(k) or 403(b) will help boost your retirement savings. It’s the right time to start investing in some lower-risk bonds too, unless you have been neglecting your retirement savings plan. A financial advisor can help determine the ideal investment mix to achieve your savings goals while maintaining an acceptable risk level.
In Your 50s and 60s: Start Preparing for Retirement
If you need to build emergency funds to meet unexpected medical expenses and other costs in retirement, mature investors are allowed to start making catch-up contributions to tax-free savings accounts in the year they turn 50. In 2018, you can save up to $24,500 in a 401(k) and up to $6,500 in an IRA each year.
When you are in your last decades of saving for retirement, it is time to start rebalancing your portfolio. Consider moving your funds into bonds and money markets. A financial advisor can help you compile a comprehensive financial profile, assessing all your funding sources to figure out your ideal investment mix to provide income throughout your retirement.
We suggest using the above recommendations as starting points to saving for retirement throughout the different life stages. However, regardless of age, everyone can benefit from a personalized retirement plan. As financial professionals, we are available to help you figure out the ideal asset allocation for your retirement savings plan at your stage of life. Please contact us for a complimentary consultation.
Limitations and Early Withdrawals: Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Retirement Plans: Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Friedberg, B. (2018, May 21) Here’s How You Should Invest at Every Age. [Blog post]. Retrieved from https://www.thebalance.com/how-to-invest-at-every-age-4148023
Leary, E. (2007, November). Best Investing Moves at Every Age. [Blog post]. Retrieved from https://www.kiplinger.com/article/investing/T052-C000-S002-best-investing-moves-at-every-age.html
Kumok, Z. (2017, Jan. 7) Are Your Investments Right for Your Age?. [Blog post]. Retrieved from https://www.investopedia.com/articles/investing/090915/are-your-investments-right-your-age.asp
Frankel, M. (2017, May 28). Here’s How to Determine Your Ideal Asset Allocation Strategy. [Blog post]. Retrieved from https://www.fool.com/retirement/2017/05/28/heres-how-to-determine-your-ideal-asset-allocation.aspx