Wondering how to save up for retirement? Confused about how to invest as you grow older? We understand.
With people living longer nowadays, age-appropriate investments are as important as ever. But what is asset allocation by age, and is it worth it? Let’s find out.
What Is Asset Allocation?
‘Asset allocation’ refers to how you arrange the assets in your portfolio, which can include stocks, bonds, cash, real estate, commodities, and futures bonds. These assets have different levels of risk and rewards.
If you invest all your cash in one asset and it takes a dive, you’ve got zero protection against bankruptcy and risk a total wipe-out. This is why diversification in asset allocation is essential if you don’t want to lose all your capital if an asset goes south.
Is Investment Portfolio Allocation by Age Worth It?
Changing your portfolio allocation by age is worth it, because the older you get, the less risk you’ll be able to tolerate–both health-wise and financially. In other words, you won’t have the time to lose money and wait for markets to bounce back when you’re older.
For instance, while an Oxford Income Letter portfolio can get you dividends, you won’t see any without investing a lot of time and patience. This was the case with Intellia Therapeutics, a 2017 recommendation that took four years to pay expected yields.
So, taking risks when you’re young and can qualify for more loans and jobs, such as in your twenties, thirties, and forties, is an excellent way to build a nest egg that could power you through your retirement.
Investment Strategy by Age
Investing by age can help you make the most of your money without placing it at unnecessary risk. Let’s take a look at how your asset allocation should evolve as you get older:
Twenties
Example asset allocation:
Bonds: 10% to 20%
Stocks: 80% to 90%
While you’ve probably just graduated and are still buried under student loans, you shouldn’t waste this time. So, whether it’s in stocks, a Roth IRA, or a 401(k), start investing, because you’ve got a huge advantage over every other investor–time.
This is important because what you’ll invest in now is going to compound (due to interest) over the decades, meaning you can be worth over a million before you hit fifty. If you’ve got more money to spare, you can invest in growth stocks, which, while risky, provide excellent returns.
Thirties
Example asset allocation:
Bonds: 20% to 30%
Stocks: 70% to 80%
If you didn’t invest during your twenties because of student loan burdens and a paycheck to paycheck life, it’s time to start setting money aside–at least 15% to 20% of your pay–in bonds, stocks, and a company 401(k).
Your 401(k) is especially crucial because your employer can match what you contribute. For instance, if you pay $12,000 toward it, your employer can pay another $12,000 on top, increasing your retirement cushion.
While you can afford to invest in risky stocks, it’s time to add bonds into your asset allocation mix.
Forties
Example asset allocation:
Bonds: 30% to 40%
Stocks: 60% to 70%
If you’ve been steadily building your portfolio over the past two decades, you’re already on track to a cozy retirement–but you can do more. So, sign up for the best investment newsletter to find funds to choose from, or meet up with a financial expert to get tailored investment advice. You should also invest in stocks to get ahead of inflation and continue to contribute to your IRA and 401(k) contributions.
Fifties and Sixties
Example asset allocation:
Bonds: 40% to 50%
Stocks: 50% to 60%
If you focused on making the most of tech or other hot stocks during your thirties and forties, now is the time to become more cautious and switch your capital to bonds and other stable assets like money markets. You should also keep contributing to your 401(k) and Roth IRA, which you can maximize as much as possible because the IRS allows those over fifty to make additional contributions.
Seventies and Eighties
Example asset allocation:
Bonds: 50% to 70%
Stocks: 30% to 50%
You’re probably retired at this point, so it’s time to focus on stocks that give dividend income and bond holdings. You’ll also be getting required minimum distributions (RMDs) and Social Security benefits at this point.
Try to withdraw these on time, especially the RMDs, because you’ll get slapped with a penalty on the amounts you should’ve withdrawn but didn’t. However, if you’re working, you can keep contributing to your IRA, provided your income doesn’t exceed the IRS income thresholds.
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