Regardless of when you start investing, using the right strategies, understanding the pros and cons of different investments and assessing your risk profile are all essential for you to build a nest egg that will provide the funds you need during retirement. But as you go through different stages of your career and life, you'll find that you have changing priorities that can depend on major purchases you need to make, how much you earn at that stage and how far from retirement you are. Further, your risk tolerance and allocation for investments will usually change significantly between your 20s and 50s. Take a look at some key considerations you can use for investing over the different decades.
Understanding Important Investment Considerations
Some of the many investments you might make in a retirement account or general brokerage account include bonds, stocks, mutual funds and exchange-traded funds (ETFs). Each of these types has different risk levels and earning potential, and these factors will affect how you allocate such investments and diversify your portfolio. For example, stocks can come with high risk but also high rewards, while bonds are less risky with lower returns. Both mutual funds and ETFs involve having the funds put in various securities, so the risk level and reward can vary for these.
When thinking about the types of investments to make, you'll want to consider your risk profile and investment horizon. Your risk profile refers to how much risk – and the potential to lose money – you can tolerate, while your investment horizon refers to how long you plan to hold the investments to reach your goal. For example, if you're in your 20s and you're investing for retirement, you might have a higher risk tolerance and be willing to put more money in volatile stocks since you have several decades for the investments to grow. But if you're in your 50s, you might have a low risk profile since retirement is near and thus accept a lower return on your investments.
Your investment horizon and risk profile also affect how you might trade securities. If you're a high-risk investor, you might opt for active trading to try to take advantage of short-term changes in stock prices that financially benefit you. On the other hand, you might use the buy and hold strategy if you have a long time horizon and want to wait and see how the stock's price goes up in the long term.
Investment Strategies for Your 20s
Getting started with investing in your 20s offers the advantage of having more time to contribute to your nest egg and maximize your earnings through the next decades. However, this can also be a tricky decade to save for retirement when you might have plans to save for other major expenses such as a house, vehicle, wedding or travel. At the same time, you might have less money to stash away as you pay your student loans and possibly earn a lower income than you will once you get established in your field. So, you'll need to assess your priorities and determine how much you can afford to invest while meeting your other financial goals.
This is a good time to use a retirement calculator to get an idea of what you'll need to save regularly so that you have enough money for the post-retirement lifestyle you want to live. This usually means entering information about your age, risk level, planned retirement age, current income, income during retirement and expenses you plan to incur. Once you have a recommended monthly or yearly investment amount, you should assess your budget to see if you can afford that amount. You can then look into options such as opening an IRA, getting a 401(k) at work or obtaining a general investment account through a broker such as Charles Schwab, Fidelity or E-Trade.
Since you still have a long time until retirement at this stage, you might opt to allocate more money in investments that yield the possibility of a higher return but come with higher risk. For example, you might shift most of your retirement portfolio allocation (80 percent or more) to stocks versus bonds when you've got a long investment horizon at this age. You might also participate in riskier techniques such as active trading. However, your investment decisions can depend on the market conditions and your personal risk tolerance, and keep in mind you can rebalance your portfolio or change your strategy in response.
Read More: What Is the Safest IRA to Put Your Money in?
Investment Strategies for Your 30s
By the time you enter your 30s, it's a rule of thumb to have one year of your income saved in your nest egg, and the amount should triple by the time you get to age 40. This means that your 30s can be a decade of catching up for any shortfall from your 20s as well as accelerating your retirement savings as your income now allows you. You might use this decade to make the maximum contributions to the retirement accounts you have as well as invest extra money in other sources such as a brokerage account or annuities.
Since your investment horizon is still quite far away until retirement, you might continue having a higher-risk portfolio where the majority of your funds are in stocks rather than bonds. However, you might decide to slightly tweak the allocation to a ratio such as 70 percent stocks and 30 percent bonds to slightly lower the risk as you get older. This is also a good time to take advantage more of the buy and hold strategy alongside participating in active trading as your risk preferences allow.
Your 30s are also a good time to start investing money toward the college tuition your current or future children might have. You could do this through specialty products such as a 529 plan or Coverdell Education Savings Account. You can also invest in mutual funds, bonds and stocks in a brokerage account or even plan to use Roth IRA funds if necessary when the time comes. Further, consider leaving money aside in an emergency fund to cover several months to a year of expenses as well as chipping away at debt such as student loans and credit cards when you can.
Read More: Can There Be Co-Owners on a 529 Plan?
Investment Strategies for Your 40s
As you get closer to your peak earning years, you'll continue the trend of heavily saving toward retirement during your 40s. This means making the maximum contributions to tax-advantaged accounts as well as investing extra in a brokerage account or annuities. Ideally, you'll have at least five times your income saved by the time you reach 50, and working toward this goal can make it less stressful trying to catch up even more in your 50s and beyond.
At this stage, your investment horizon also gets shorter since your retirement age may be just a couple of decades away. This means you'll likely want a more stabilized portfolio that's less susceptible to the high and low swings that riskier investments like stocks can bring. So, you might decide to evenly split your portfolio between stocks and lower-risk investments at this point to have a more moderate risk level, and you might avoid riskier trading moves like day trading more. That way, you might see a lower return on the non-stock portion in exchange for less volatility that could otherwise cause stress as you get closer to retirement.
Like during your 30s, you might continue contributing to your children's college savings alongside investing money in retirement accounts. At the same time, continue working on getting rid of debt – especially those that can have high balances and high monthly payments like student loans and mortgages as you enter the last decades of working. Not having such debt during your retirement years can help you live more comfortably on the money that's grown through your time investing.
Investment Strategies for Your 50s
When you reach your 50s, it's a good time to reassess how close you are to reaching your savings goal, as it's generally recommended to have seven times your current income by the end of this decade. But as your life situations may have changed due to debt you've accrued or perhaps a decision to work longer, you may end up needing more or less money than you initially planned. So, you might want to run the numbers through a retirement calculator again to get an updated figure. Once you know where you stand, you can work on investing as much as possible so you can catch up on any shortage.
Once you reach 50, you have the advantage of being allowed to make catch-up retirement account contributions that range from an extra $1,000 for IRAs to an extra $6,500 for 401(k)s. You can look at your budget to find areas to reduce costs or use windfalls you receive to allocate more savings to your retirement accounts as well as any other portfolio you have. While you plan to make higher contributions, also consider looking at your debts and coming up with a plan to pay them off so that you have less of a burden during retirement.
You'll likely also want to change your asset allocation further as you get closer to retirement and want to minimize the risk that you lose a lot of money on your investments. Almost the opposite of when you started in your 20s, you'll likely have 70 percent or more of your investments as safe bonds and allocate the remainder to riskier stocks. However, if you've fallen behind on your goal, you might opt to continue to invest more heavily in stocks to maximize the profits and accept the trade-off of higher risk.
Read More: How to Calculate Portfolio Risk
Investment Strategies Beyond Your 50s
When you enter your 60s, you still have opportunities to invest your money, and this can be a good idea whether you've fallen short of your initial goal or would prefer to have extra money for leisure during your retirement years. You'll also need to make the important decision of deciding when to retire since the age can affect the Social Security benefits you receive and thus the nest egg you'll need. For example, you might decide to delay retirement until age 70 to receive 132 percent of your Social Security benefits as well as continue to invest money in retirement accounts as you work.
Even after you quit working, you can still put money in non-employer accounts such as IRAs and brokerage accounts. At this stage of life where stability and low risk are very important, you might further reduce your allocation to 20 percent stocks and have the rest as safer investments like bonds. You can also keep in mind that while you'll be taking distributions from retirement accounts, the money kept in them will still grow. The same is the case for other brokerage accounts where you can continue to see earnings.
Read More: The IRS Definition of Retirement
- Edward Jones: Investing in Your 20s
- State of Connecticut: Investing Your Money
- SEC: Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions
- Charles Schwab: What Is a Brokerage Account?
- Ally: Savings by Age: How Much to Save in Your 20s, 30s, 40s, and Beyond
- FINRA: 5 Things to Do In Your 50s and 60s to Boost Retirement Savings
- US Bank: Investment Strategies by Age
- SoFi: Investing for Beginners: Basic Strategies to Know
- Investor.gov: Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing
- FINRA: Stock Trading vs. Buy and Hold
- Charles Schwab: Retirement Calculator
- Edward Jones: Investing in Your 30s
- Nationwide: How to Save and Build Wealth in Your 40s
- ALEC: Investing in Peak Earning Years
- Social Security Administration: If You Were Born Between 1943 and 1954 Your Full Retirement Age Is 66
- Investor.gov: Annuities
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.