A general rule of thumb is that you’ll need about 80% of your pre-retirement income after you retire. But saving that much and creating an effective investment strategy can be difficult.
Developing an investment strategy by age can make it easier to meet your retirement savings goals.
Guidelines for an Investment Diversification Strategy by Age
It’s important to start saving as much as you can, as early as you can. The power of compounding can make it easier to grow your investments without contributing additional money.
Over time, you’ll also need to reallocate your investments to better meet your age. Using an optimal investment strategy by age can help balance the amount of risk you can handle with the time left until you retire. The Stanley Druckenmiller investment strategy is a great template.
In Your 20s
It might be difficult to invest a lot since you may still be getting started in your career. But, even investing just a small amount can make a huge difference later.
Aggressive investing in 20s can also make a significant difference. You have a long time until you retire, meaning you can deal with additional risk. Keep your portfolio stock-heavy, about 80%, and have the rest in bonds and cash investments, which are less risky.
In Your 30s
In your 30s, you still have about 30 years in the market before you retire. Temporary stock price declines won’t cause much damage because you can recoup the money later. Aggressive investing is still the way to go. Or you could opt for a target-date mutual fund.
In your 30s, try to invest as much as possible into your employer-sponsored retirement plan or open a Roth IRA. You may be able to get a match from your employer.
This should also be the time you invest in other portions of your life. If you are going to stay in the same area for a while, purchasing a home may be a good investment. Taking steps to advance your career could lead to promotions or raises too.
In Your 40s
In your 40s you still have some time for your nest egg to grow. If you are just starting to invest, you’ll need to do some catching up to prepare enough. Try to contribute the maximum amount to your retirement fund each year.
Your investment strategy should start to be a little more lower-risk. Add more bonds and fixed investments instead of stocks. A 60% stock, 40% bond allocation is a common portfolio mix. You can also add additional international funds and REITs as well.
In Your 50s
Once you reach your 50s, you need to prepare carefully. Sit down and examine your income, expected income, and tax situation. You may be able to keep doing what you are doing if you are on track.
As you move towards retirement age, gradually decrease the percentage of stocks in your portfolio. Move to less risky cash and bonds as your investments.
You should also check when you will be eligible for Social Security benefits and how much you can expect to receive. If you expect a decent amount, you could delay spending your nest egg for a few more years to continue to let it grow.
Choosing the Best Investment Strategy by Age
Age-based investing can make it easier to adequately prepare for retirement and your other financial goals. By crafting a well-planned investment strategy by age, you’ll feel confident knowing that you are saving enough to cover your needs in retirement.
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