As they grow older, many people choose to make their investment strategy more conservative.
When you're in your 20s, you can wear clothing you wouldn't consider when you're in your 60s. The same is true of investing.
20s and 30s
Invest for growth - With many years until you will need the money, you can afford to take on some investment risk. That means committing as much as 70 to 100 percent of your total investment to stocks and/or stock mutual funds. Of course, principal values and return on stocks will fluctuate, while fixed income investments generally offer both a more stable principal value and a fixed rate of return when held to maturity.
Protect yourself - Although often overlooked by younger people, comprehensive insurance coverage is important. It helps to protect your current savings, as well as future earnings. Other important protections typically put on the back burner are disability income insurance and umbrella-liability insurance, which provides additional coverage in the event of certain types of lawsuits.
Save as much as you can - To provide for a comfortable retirement at age 65, you should strive to save as much as you can. Some experts recommend a savings goal of 15 percent of your income, including any matching contribution from your employer, although you'll need to save more than that if you plan to retire before normal retirement age.
40s and 50s
Keep investing for growth. You may consider keeping 50 to 60 percent of your investment portfolio in stocks and the balance in bonds. Then, as you approach retirement, consider moving from growth funds and high-yield bond funds to growth-and-income funds and high quality bonds. However, depending on your overall level of assets, your level of risk tolerance and the number of years you plan to work, you may want to maintain a sizable equity position well into retirement in order to be sure your assets keep pace with inflation.
Look for tax-deferral - Take full advantage of tax-deferred vehicles for pre-tax salary contributions, such as 401(k) plans and Individual Retirement Accounts (IRAs). You are likely to earn the most salary in your 40s and 50s, so it's important to find ways to defer current taxes. Annuities are generally purchased with after-tax money, but allow any earnings to potentially accumulate tax-deferred. Of course, income tax is due upon withdrawal and withdrawals prior to age 59 1/2 may be subject to an additional 10 percent tax penalty. If an annuity contract is used to fund a retirement plan, you should be aware that such an annuity does not provide tax deferral benefits beyond those already provided by the Internal Revenue Code. Before purchasing, you should consider whether the annuity features and benefits help meet your needs and goals.
Perform an annual retirement update - Once a year, project your retirement income needs so you know how much you should be saving to reach your goal and when you can retire. Don't forget to factor in an inflation rate since even modest inflation can severely erode the buying power of your retirement nest egg over a 10- to 30-year retirement period.
By your 50s, you should have a good idea what you are likely to get from Social Security and your company pension at retirement. The balance must be made up with personal savings. And you should know by this time if you are saving enough or will need to save more to reach your retirement goal.
Plan your estate - At this point in your life, you should have three basic estate planning documents: a will, a durable power of attorney or living trust (in case you become incapacitated) and a living will with a health care proxy. For an estate over $1,000,000, you should consult your own legal and tax advisor about whether you could benefit from more advanced estate planning arrangements such as testamentary trusts and life insurance trusts.
Consider Paying off your mortgage before you retire - A mortgage-free retirement can free up substantial income to do other things.
During retirement
Consider keeping a portion of your assets invested in stocks - Depending upon your comfort level with market volatility and your personal financial situation, some level of equity investing may help you maintain growth potential during a retirement that may last decades. Look for conservative equities, such as dividend-paying (equity-income) mutual funds or index funds.
Keep saving if you can - Since you may be retired 20 to 30 years or more, some level of saving and reinvesting can help offset inflation's impact on the purchasing power of your retirement income, particularly if your retirement benefits do not have a cost of living adjustment. Retirees under age 75 should strive to reinvest at least some of their investment gain.
Review your financial and estate plans periodically - Make sure your will and other documents are up-to-date. And, always keep your loved ones informed about your finances, insurance, health care arrangements and any special needs.
No matter what stage of life you're in, talk to your financial professional for more information about the appropriate strategy for your particular financial needs.
Jason Anderson is an Auburn native and financial consultant with AXA Advisors. He may be reached at 425-6340 or jason.anderson@axa-advisors.com
20s and 30s
Invest for growth - With many years until you will need the money, you can afford to take on some investment risk. That means committing as much as 70 to 100 percent of your total investment to stocks and/or stock mutual funds. Of course, principal values and return on stocks will fluctuate, while fixed income investments generally offer both a more stable principal value and a fixed rate of return when held to maturity.
Protect yourself - Although often overlooked by younger people, comprehensive insurance coverage is important. It helps to protect your current savings, as well as future earnings. Other important protections typically put on the back burner are disability income insurance and umbrella-liability insurance, which provides additional coverage in the event of certain types of lawsuits.
Save as much as you can - To provide for a comfortable retirement at age 65, you should strive to save as much as you can. Some experts recommend a savings goal of 15 percent of your income, including any matching contribution from your employer, although you'll need to save more than that if you plan to retire before normal retirement age.
40s and 50s
Keep investing for growth. You may consider keeping 50 to 60 percent of your investment portfolio in stocks and the balance in bonds. Then, as you approach retirement, consider moving from growth funds and high-yield bond funds to growth-and-income funds and high quality bonds. However, depending on your overall level of assets, your level of risk tolerance and the number of years you plan to work, you may want to maintain a sizable equity position well into retirement in order to be sure your assets keep pace with inflation.
Look for tax-deferral - Take full advantage of tax-deferred vehicles for pre-tax salary contributions, such as 401(k) plans and Individual Retirement Accounts (IRAs). You are likely to earn the most salary in your 40s and 50s, so it's important to find ways to defer current taxes. Annuities are generally purchased with after-tax money, but allow any earnings to potentially accumulate tax-deferred. Of course, income tax is due upon withdrawal and withdrawals prior to age 59 1/2 may be subject to an additional 10 percent tax penalty. If an annuity contract is used to fund a retirement plan, you should be aware that such an annuity does not provide tax deferral benefits beyond those already provided by the Internal Revenue Code. Before purchasing, you should consider whether the annuity features and benefits help meet your needs and goals.
Perform an annual retirement update - Once a year, project your retirement income needs so you know how much you should be saving to reach your goal and when you can retire. Don't forget to factor in an inflation rate since even modest inflation can severely erode the buying power of your retirement nest egg over a 10- to 30-year retirement period.
By your 50s, you should have a good idea what you are likely to get from Social Security and your company pension at retirement. The balance must be made up with personal savings. And you should know by this time if you are saving enough or will need to save more to reach your retirement goal.
Plan your estate - At this point in your life, you should have three basic estate planning documents: a will, a durable power of attorney or living trust (in case you become incapacitated) and a living will with a health care proxy. For an estate over $1,000,000, you should consult your own legal and tax advisor about whether you could benefit from more advanced estate planning arrangements such as testamentary trusts and life insurance trusts.
Consider Paying off your mortgage before you retire - A mortgage-free retirement can free up substantial income to do other things.
During retirement
Consider keeping a portion of your assets invested in stocks - Depending upon your comfort level with market volatility and your personal financial situation, some level of equity investing may help you maintain growth potential during a retirement that may last decades. Look for conservative equities, such as dividend-paying (equity-income) mutual funds or index funds.
Keep saving if you can - Since you may be retired 20 to 30 years or more, some level of saving and reinvesting can help offset inflation's impact on the purchasing power of your retirement income, particularly if your retirement benefits do not have a cost of living adjustment. Retirees under age 75 should strive to reinvest at least some of their investment gain.
Review your financial and estate plans periodically - Make sure your will and other documents are up-to-date. And, always keep your loved ones informed about your finances, insurance, health care arrangements and any special needs.
No matter what stage of life you're in, talk to your financial professional for more information about the appropriate strategy for your particular financial needs.
Jason Anderson is an Auburn native and financial consultant with AXA Advisors. He may be reached at 425-6340 or jason.anderson@axa-advisors.com
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