Along with your investment objectives and risk tolerance, your age plays a big role in how your portfolio should look. Generally speaking, the longer your investment time horizon, the more aggressive you can be.
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However, many other factors shape exactly which investments you should own in your portfolio, from your income and lifestyle expectations to your marital status, longevity expectations and whether you have dependents.
While you should always consult with a financial advisor regarding the construction of your portfolio, here’s some advice as about the types of investments you should consider owning in every decade of your life.
Your 20s is the best time to get aggressive with your portfolio, as you’ll have the longest time to recover from any market setbacks. You’ll also be able to take advantage of the power of compound interest, as it takes some time to really see those effects.
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Of course, when you’re in your 20s, you’re likely just starting out in the working world, meaning your income may be at the lowest level you’ll see in your entire career. This means two things:
First, you should prioritize establishing an emergency fund and a savings account. This will help you get through any rough patches and help you avoid going into debt. Second, while you won’t be able to plow tons of money into your investment accounts, even small amounts can make a big difference at this young age.
As incredible as it may seem, just a $160 monthly investment at a 10% annual return can result in a nest egg of over $1 million 40 years down the road. In other words, by investing in growth stocks for the long run, historically speaking, even a small amount set aside monthly has yielded impressive returns.
Once you’re in your 30s, it’s a good time to start putting away real money into your retirement accounts. By now, you’re likely earning a better salary, giving you the freedom to amp up your retirement investments.
This is also a great time to take advantage of the employer match in your 401(k), if applicable, as it’s the best source of “free money” you’re likely to find. If you don’t have that option, fully funding an IRA is a good choice.
At this age, you might also start dabbling in real estate, in terms of either rental property or your own primary residence. If you’ve been doing a good job saving while in your 20s, you may have enough for a down payment by your 30s, and you’ll still be young enough to pay off your entire mortgage before you reach retirement age.
In your 40s, your investment focus may turn to funding education for your children and/or tucking away money for your health expenses.
In your 40s, you may be moving up in your tax bracket, and the deduction you can take for contributions to a health savings account could be invaluable. Plus, you’ll benefit from tax-free growth in the account and tax-free withdrawals for qualifying medical expenses, which likely will start to increase from your 40s and beyond.
If you have children, you can fund a 529 college savings plan or other account to help prepare for your upcoming expenses.
Catch-up retirement plan contributions
Although you hopefully began putting money into your retirement accounts in your 20s and 30s, when you’re in your 50s, it’s time to really start focusing on pumping up those accounts. As you’re likely at or near your peak earnings level, you should be able to fund more substantial contributions to these accounts.
Plus, after you reach age 50, the IRS allows you to make “catch-up” contributions to IRAs, 401(k)s and other retirement savings accounts. The allowable increase for an IRA in 2022 is $1,000, meaning you can sock away up to $7,000 per year at age 50 and beyond. The benefit is much more significant for a 401(k) plan, however, as you’re allowed a catch-up contribution of $6,500. This means you can kick in as much as $27,000 to a 401(k) plan in 2022.
Income protection products
In your 60s, you can start looking at annuities and other investment products that can guarantee a lifetime of income. After age 59 1/2, you can take withdrawals from products like annuities without any early withdrawal penalty, so it makes sense to consider them in your 60s.
Whereas you may outlive a traditional stock-and-bond portfolio, annuities, insurance and other income protection products offer payments that continue for your entire life, no matter how long that may be. This can make these types of products a good “safe harbor” option as a complement to your other investments.
Still some growth
Your 70s are a time to dial down the riskier elements of your portfolio in favor of safer income-generating options. Treasury bills and CDs don’t always pay the highest amount of interest, but they will keep your principal safe. This is important because you may not have time to recover from a 20% to 30% drop in a stock-heavy portfolio.
However, you shouldn’t completely abandon the growth elements of your portfolio because you may still live 30 years or more, and you’ll need your overall portfolio to at least keep up with inflation if you want to avoid the erosion of your purchasing power.
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