Along with saving for a down payment or setting aside money for college, planning for retirement tops most Americans’ list of investment priorities. But the strategies that make the most sense when you’re 25 — Take on risk! Focus on stocks! — don’t necessarily make sense as you enter your 30s and 40s. That’s why it’s a good idea to know how to invest at any age.
Volatility in the economy and changes to the typical career trajectory may also impact when you’re able to start saving. If you spend the majority of your 20s working to pay off student loans, for example, or only recently entered the labor market in your 30s or 40s, you’ll need a different approach to investing than someone with a more typical résumé.
As a serial entrepreneur who has worked in a salaried position and now writes about day trading, I appreciate the complexities of managing your money. Below are my suggestions on what to keep in mind when investing, regardless of your age.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Investing in Your 20s
It’s never too early to focus on retirement. Even if it’s only a nominal sum, get into the habit of setting aside some portion of your income each month. You’ll want to deposit these funds into retirement-specific savings account for this purpose, either a 401(k) or an individual retirement account (IRA).
If you’re a student or self-employed, you can open an IRA on your own through a bank, licensed brokerage firm or a robo adviser. If you’re employed, check to see if your company automatically enrolled you in its 401(k) plan and, if not, complete the paperwork needed to sign up. Be sure to review the different account types and investment choices available, as well as the company policy on matching your contributions.
Once you’ve set up a retirement savings account and started making contributions, think about other ways to begin growing wealth. Opening a brokerage account enables you to begin investing in stocks or other securities, like mutual funds or exchange-traded funds (ETFs), as well as bonds. You can do this alone or with the assistance of a robo adviser. These sophisticated algorithms will manage your investments for a lower fee than a human adviser.
If you have the option, you may prefer to work with a certified financial planner to develop an investment strategy that matches your risk tolerance. At this age, you should feel comfortable taking larger risks than you might later in life, as you have plenty of time to watch your investments recoup any losses.
Focus on your career and adjust your savings plan as your income increases. Don’t wait to start saving until you reach a certain income level. Even $50 a month matters when you’re trying to build the habit of investing, but make sure you adjust your contributions to match your income level.
Investing in Your 30s
If you haven’t yet had the opportunity to open a retirement account, now’s the time. If you have a 401(k) or IRA, try to make the maximum annual contribution. This goes double — literally — if you’re eligible for matching contributions from your employer. Already making the maximum annual contribution? Consider supplementing your retirement funds with a Roth IRA.
This is also a good time to diversify your investments. The best way to do this is by investing in an index fund. Even better, invest in a few different index funds with varying levels of risk. You should also begin purchasing bonds, if you haven’t already, to balance out the risk of stocks.
If you enjoy researching fund performance, you can do this yourself for free. Otherwise, certified financial planners can help you design an investment strategy or manage your investment for an annual fee. If you’re not entirely confident in your investment skills but don’t want to shoulder the cost of an adviser’s fee, you might consider a robo-adviser.
That said, don’t put all your focus on retirement. If you have children, you’ll also want to think about planning for college. People planning for homeownership will also want to explore savings strategies like high-yield accounts to help you build your down payment. As your income increases, think about how you can best prioritize your savings strategy to meet your family’s needs in the future.
Investing in Your 40s
At this stage in your life, you likely have at least one retirement account in your name. If you’ve changed jobs frequently or opened an independent IRA, however, you may have multiple “pots” of money managed by different entities. Consolidating these accounts will help you avoid excessive management fees and give you a clearer picture of your progress toward your savings goals.
Rolling over your 401(k) into an IRA can also protect you from high tax bills and make it easier to diversify your portfolio. While a 401(k) limits your options to those provided by the administrator, an IRA gives you access to a broader selection of instruments.
In particular, you’ll want to consider a Roth IRA. Though most people associate this account with younger investors, it has benefits for those further on in life, too. Roth IRAs offer more time to grow your wealth — you’re not required to begin taking distributions at age 70 and can continue making contributions at any age if you’re still earning income. If you suspect you might need access to some of your money before age 59, the Roth IRA isn’t subject to the same early-withdrawal penalties and taxes as a traditional account.
If you’ve focused entirely on putting money aside without investing, think about whether this strategy will help you reach your retirement goals. It may be time to begin looking into different types of funds and securities to make your money work harder. You won’t want to take on significant risk at this stage in your life, but sensible exposure via a mutual fund or index fund can go a long way toward increasing your quality of life later on.
For those just beginning to save, you can make up for the lost time by choosing the right allocation of assets. In this case, we suggest working with an investment adviser to identify the right mix of high-performing stocks mixed with bonds. A robo-adviser can also do this work, but given that you don’t have time to make mistakes, an experienced professional is worth the investment.
Investing in Your 50s
Didn’t quite make your savings goals earlier in life? Not to fear. That’s both completely normal and easily addressed. Starting at age 50, you’re eligible to make additional “catch-up” contributions to a 401(k), and the maximum contribution to an IRA increases. Even an extra $100 a month can significantly increase your retirement income.
If your 30s and 40s were about expanding your investment portfolio, your 50s are all about refining it. As your anticipated withdrawal date approaches, you may want to adjust your investments to reflect a lower risk appetite. You’ll also want to take a good look at the specific types of investments in your portfolio to ensure a balanced portfolio.
-
Cord Cutting Could Help You Save Over $10,000 in 10 YearsHow cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial PlansFinancial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around YouWhile thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.
