Whether you’re a graduate just starting out on your career or a veteran worker with the finishing line in sight, investing to secure your financial future using retirement savings is essential. As state coffers dwindle and pensions become ever-less generous, none of us should be relying on state benefits to sustain us through our twilight years. Wherever in the world you plan to retire, the onus is very much on you to ensure that you have sufficient savings to live off of when you stop working.
How do you Choose Investment Strategy by Age?
There are certain investment rules of thumb which apply to everyone, whatever their age. These include keeping a diversified portfolio and investing within your own parameters of risk. However, your asset allocation (how you choose to divide your investment pot between shares, bonds, property, cash etc.) will change over the course of your lifetime so yes, investment strategies you use need to be reviewed and tweaked as you age.
Here are some pointers of what you should be thinking about at different stages of your working life with regard to your financial planning:
Investing in your 20s and Early 30s
Start Saving Early
Make sure that you get into a savings habit while you are still young and learn proper asset allocation. Retirement may seem very distant but it will come round quicker than you think and you don’t want to squander the potential that compound interest rates offer when they have three or more decades over which to work its magic and give you free money or extra income for your personal finance or portfolio.
Retirement accounts also help you have more money to spend during your golden years and live out your post retirement comfortably instead of being afraid that you’ll lose all your money after you stop working. A certified financial planner will be able to assist you in creating your retirement account using wise investment decisions and guide you with proper asset allocation.
You can Afford to Take Risks
With youth in your favour, you can afford to take greater or more risk with your asset allocation and portfolio. In fact, now is exactly the right time to take higher risks and potentially gain higher rewards but only if you are comfortable with the potentially extreme fluctuations in the value of your portfolio due to the instability of the stock market conditions.
When you are young, you have more money and time is on your side so any falls in the value of your investments can be recuperated over the decades that follow. You also have plenty of time to fix shortfall issues that make you lose money by changing lifestyle or increasing savings account. At a young age, you can face the market risk and not worry about not saving enough until you get closer to retirement age.
Build an Emergency Fund
Before you start investing into your retirement nest egg, you should first build a buffer of cash funds which you keep easily accessible. This emergency fund should be maintained throughout your working life, and you should invest in it as circumstances demand, to be used to cover any emergencies. These include periods when you are unemployed, if you have to take time off for illness or if you have sudden unexpected expenditure such as needing to buy a new car.
Invest in the Most Tax Effective Way
Certain pensions and savings vehicles could maximise the returns on your savings and increase risk tolerance so it is worth finding out about which investment strategies are relevant to you depending on where you live and which portfolio holds your assets or investments. Making the most of tax breaks from the start can make a big difference to your final pension pot.
Investing in your Late 30s and 40s
Get a Firm Handle on your Pension Requirements
Mid-life is often the time when the reality of retirement starts to loom into view. People tend to become increasingly aware of their mortality, accompanied by a realisation that, if you are lucky, retiring in your sixties could mean you need to support yourself for three decades or more on your investments and savings. It’s a sobering thought for many. You may well be hitting your stride with regards to your career about now with peak earnings potential and can maybe afford to up your savings. You’ll also start to have a reasonable picture of how your working life and future earnings will pan out. Now is the time to drill down and look at how much you want to save, the time you have left and whether the two are in alignment.
Take Less Risk
Now is the time to reduce the amount of money you have invested in higher risk shares and look towards less volatile assets such as bonds because of dwindling risk tolerance. Of course, some of your investment fund can stay in equities – you still have a reasonable time in which to recuperate potential losses – but it’s a question of balance.
Keep an Eye on Tax Changes
It’s worth reviewing your investment vehicles to ensure that they are still in line with your situation and investment goals. Legislation changes all the time and what may have been best for you when you chose an investment strategy by age may not be the optimal choice now. The value of your investments will be increasing so tax considerations may have greater implications.
Investing in your 50s and Beyond
Go Low Risk
After 50 your tolerance to risk plummets and with fewer years left to recoup any major stock market losses you simply can’t afford to take any gambles with your investments. Reduce the percentage of your portfolio invested into equities and shift towards bonds and perhaps shares which pay guaranteed dividends to provide an income.
Estate Planning and Asset Allocation
Estate planning is something we’d advise anyone of working age to get sorted but it’s absolutely imperative at this stage of your life. Make sure you have a will in place to guarantee that your assets go to the people you want them to should you pass away and if you have children, make sure you nominate guardians. Your portfolio may need restructuring to take into account how you will pass your assets to your children and/or grandchildren.
Review Expected Retirement Income and Expenditure
Now that you’re starting retirement planning, you will have a better idea of any pension and state benefits you will receive once you stop working and what your expenditure might be. For example, if you have paid off a mortgage, or will do so in the coming years, then you won’t have housing costs to worry about after your retire. Any shortfall between income and expenditure will need to be covered by investment income, purchase of an annuity or liquidation of assets e.g. equity release from a home.
However old you are, financial planners is an essential ally in helping you with asset allocation and in clarifying your financial goals in order to plan for a comfortable retirement and maximise the return from your investments and other assets. If you don’t already have one, give us a call and see how we can help you review your investment strategy to verify whether it is appropriate for your age or if it needs tweaking in order to meet your retirement needs.
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