5 Rules for Portfolio Planning When You're 45

Forty-five is a strange age to be an investor.

You're not 25, which usually comes with four decades of runway and the overconfidence of youth that matches how aggressive your portfolio should be. But you're not 65, either, meaning you're not so close to retirement that you're counting every dollar you'll have available and feel the need to button up your holdings.

You're somewhere in the middle. Forty-five is old enough that retirement no longer feels like an abstract concept, but young enough that you still have real time to pursue growth and let compounding do its thing.

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That in-between status is what makes portfolio planning at 45 so easy to get wrong.

Let's go over some of the most important considerations when it comes to investing at this stage in your life.

How to invest when you're 45

Age 45 won't sneak up on you — there'll be signs. Graying hairs. Achy knees. An editor who assigns you a story about portfolio planning at age 45 just a few weeks before you turn 44. (Ahem.)

Broadly speaking, however, there's nothing drastically different about reaching this mid-40s milestone. You don't gain any new rights; you don't unlock any senior discounts. You're just a little older and — one hopes — a little wiser.

Similarly, your portfolio shouldn't be drastically different than it was in your 20s and 30s. But if you have a long-term investment strategy and have been making appropriate changes to your holdings, your nest egg should be showing small signs of maturity.

With that in mind, here are five considerations to ensure your portfolio (and savings habits) are where financial professionals generally expect it to be when you reach the big 4-5.

1. Growth should still be your top priority

If you plan to retire at age 65, then age 45 should be a little past the midpoint of your working years. And yet, your portfolio construction should almost certainly look much more like what it was in your mid-20s than it should when you reach your mid-60s.

The best way to explain this is using target-date funds, which follow a "glide path" — the progression of your positions from aggressive (heavy stocks, light bonds) to conservative (light stocks, heavy bonds) as you age.

I'll use Fidelity's Freedom line of target-date funds as an example. These mutual funds each have a retirement target date, set in five-year intervals (so, 2025, 2030, 2035, etc.). The closer a fund gets to its retirement date, the more conservative it gets.

However, this switch to a more defensive stance doesn't happen evenly — there's no shift for 15 years, then a slow reduction in stocks that only really starts to pick up speed once you're in your 50s:

* Assuming retirement at age 65

Based on the Fidelity Freedom 2045 Fund (FFFGX), someone who's 45 today would be expected to own a 90/10 blend of stocks and bonds — that's still incredibly aggressive and not too different from how your portfolio would've looked like since you started working.

Why are 45-year-olds still expected to be so stock-heavy? With around 20 years left until retirement, you still have numerous market cycles ahead of you … and that will probably include at least a couple of bear markets. But that also means you have plenty of time to recover from those bear markets, which is why you can afford to be so bold.

What types of stocks you hold largely boils down to how much growth you're trying to achieve and how much stomach for risk you have. An S&P 500 fund, which blends large-cap growth and value stocks together, is generally the gold standard for a stock portfolio's foundation.

Those willing to stretch for even greater returns might consider investing in growth sectors such as technology and some communication services stock, or owning small-cap companies; those who prefer a bit more stability might opt for defensive sectors such as utilities or consumer staples, or broad baskets of stocks that are value-priced and/or pay dividends.

By the way: Fidelity Freedom Funds are on the aggressive end of the target-date spectrum. For instance, T. Rowe Price Retirement 2045 Fund (TRRKX) has a similar 90/10 blend. But Schwab Target 2045 Index Fund (SWYHX) is just 84% allocated to stocks, and Vanguard Target Retirement 2045 Fund (VTIVX) has 83% of assets invested in equities.

2. Begin layering in income investments

While growth is still a priority, you should be at least a little bit more invested in bonds now than you were in your 20s and 30s.

It's not so much that you need the cash flow today — you don't. Adding bonds, preferred stock and other fixed-income investments at this age is more about starting to smooth out volatility without meaningfully dragging down long-term returns.

You also might begin shifting at least a little of your equity portfolio into dividend-paying stocks. Companies with long streaks of raising their payouts tend to be higher-quality businesses with durable cash flows, which can add further ballast to your nest egg.

3. Diversify beyond U.S. large caps

When people start investing, they often load up on American large-cap stocks. They'll buy an S&P 500 tracker, which as mentioned before is mostly U.S. large caps. Or they'll buy sector or themed funds that are packed full of big companies. Or they'll own a bunch of popular individual companies (which tend to be large caps).

There's nothing wrong with that — U.S. large caps not only deliver the growth you need when you're young, but they'll almost always be a core part of your portfolio.

But by the time you're 45, if that's all you own, you should consider broadening your horizons.

Diversification is when you spread your risk across different investments. For instance, the target-date fund examples above illustrate portfolios that are diversified across stocks and bonds. Why does that matter? Well, equities and fixed income have very different risk/return profiles, and what might weigh on one won't necessarily hamper the other.

The same goes for other assets — commodities and real estate aren't very correlated to stock-market returns, for instance. Even diversification within the world of stocks can be useful: A small allocation to international markets might be a source of positive performance when U.S. markets are slumping.

Again, U.S. large caps have historically been one of the greatest sources of investment growth and should likely account for a majority of your assets. But even a 10% carve-out to international stocks, commodities and/or real estate can meaningfully smooth out your returns.

4. Max out what you can

You shouldn't just focus on what you invest in, but how much you invest with.

At age 45, you're still five years away from being able to make "catch-up" contributions to your 401(k) and individual retirement account (IRA), and you're 10 years away from being eligible to make health savings account (HSA) catch-ups.

But according to Bureau of Labor Statistics data, you're probably near or at your peak earnings when you're 45, which means now is the time to put the pedal down on your contributions.

Ideally, you should contribute up to the annual limit in every account at your disposal. But if you're financially constrained, here are the best ways to max out your retirement accounts:

1. Contribute up to your employer match. It's free money!

2. Max out your HSA. The HSA has more tax benefits than any other account.

3. Max out your IRA(s). Traditional 401(k)s and IRAs are both tax-deferred, but the latter typically boasts a wider selection of investments.

4. Max out your 401(k). Make the most of your tax-advantaged workplace plan.

5. Add funds to a brokerage account (which has no contribution limit). You'll have to deal with the tax consequences of a brokerage account, but it's the best remaining vehicle for growing your money once you've maxed out your tax-advantaged accounts.

5. Make tax-smart allocations

Maximizing your investments isn't just about what you own — it's about where you own it.

In a basic brokerage account, everything has tax consequences in the year it happens. Capital gains. Dividends. Interest income. But retirement accounts and HSAs are tax-advantaged — whether taxes are deferred until money is withdrawn at retirement (traditional) or taken out on contributions and never levied again (Roth), there are generally no tax consequences on anything that happens within the account.

The upshot is that certain investments are better suited to different types of accounts.

For instance, actively managed mutual funds with high turnover can generate significant capital gains that are distributed to shareholders. That's a taxable event in a brokerage account, but a nothingburger in a retirement account. Interest income is taxed as ordinary income.

If you collect that income in a brokerage account, you're taking that hit during what are likely your highest-earning years (and thus at your highest tax bracket). But if you collect it in a traditional retirement account, you can wait to take that tax hit at what should be a lower bracket.

On the flip side, indexed stock ETFs are extremely tax-efficient and thus good holdings for a traditional brokerage account. Municipal bonds pay less than similarly rated taxable bonds, but they're exempt from federal (and sometimes state and local) taxes — great when held in a taxable brokerage account, but wasted inside of a tax-advantaged plan.

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• How to Retire at 40
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• The Average Retirement Savings by Age
• Are You Rich? The Average Net Worth by Age
• I’m 45 and I’ve Barely Invested in the Stock Market. I Recently Inherited $50,000. What Should I Do?