Best Investment Strategies for Your Age
By: FCU Team
Putting your money into sound investments rather than purchases is a good idea, regardless of how you choose to invest. However, there are strategies you can use to grow and protect your portfolio more effectively at different stages of life.
These approaches account for factors like your investing goals and risk tolerance, which are likely to change (and should change) as you go from being a young adult to ultimately being of retirement age.
6 Important Considerations For Young Investors
The term “young” is, of course, open to interpretation. In this context, we’ll use it broadly to mean people who are in their twenties through their forties. If that’s you, here are six things to keep in mind regarding your investment strategy.
- Learn about investing. You don’t have to become a stockbroker, but understanding how different kinds of investments work can help you make smart choices. Take some time to understand your options by researching online or by working closely with an investment professional.
- Start investing as early as possible. For young people who get their first job, it can be tempting to spend any money left after the bills are paid each month on “fun” things like clothes, technology, or travel. And certainly, they deserve to get some enjoyment from their hard-earned cash. However, because a dollar invested today has, in theory, many decades to grow, putting $100 into a 401(k), IRA or other investment can be like gifting your future self thousands of dollars. That money will grow significantly over time.
- Educate yourself on taxes and inflation. There are many factors that can affect the success of your investment strategy. Tax and inflation rates are two that you should learn about. In the same way that you don’t need to be a stockbroker to invest wisely, you don’t need to be an economist either. But a little bit of understanding goes a long way and that knowledge may help you fine-tune your investments as economic conditions change.
- Focus on saving rather than spending. We live in a consumer culture where there is tremendous pressure to buy the latest and greatest merchandise. Making purchases can provide some short-term pleasure, but having the self-discipline to forgo them and invest your money instead will, as noted above, produce a much greater return in the long run.
- Diversify your portfolio. Investments come with different levels of risk. As a younger person, you should have investments that cover the spectrum from low to high risk. This approach tends to produce the best overall return.
- Recognize that decreasing your debt is like investing. Money that you borrow (including through credit cards) has an interest rate that continues to take a bite out of your finances each month until the debt is paid off. The sooner you can be (and stay) debt free, the sooner you can start growing your investments.
6 Financial Tips For Older Investors
For many people, their fifties and early sixties are their peak earning years. And if they have children, those offspring are likely grown and out on their own, so the financial obligations of raising a family are minimized or gone. Those facts, plus looming retirement, mean that people in this age bracket should shift their investing strategy. If you’re middle aged or older, here are six investment tips to consider.
- Assess your future income. Do you have a traditional pension? An investment portfolio? How much can you expect from Social Security? In updating your investment strategy for this new stage of life, it’s important that you understand what your future income will be based on where you are today so that you can decide how aggressive you need to be in saving and investing.
- Max out your retirement fund contributions. With investments like a 401(k), contributions are pre-tax, so maximizing them both grows your savings and lowers your taxable income. This isn’t true for all types of retirement funds, of course, so you should talk with your financial advisor before choosing your contribution level with other types of accounts.
- Make more conservative investments. Younger investors can afford to take on higher risk since they have ample time to recoup losses. As a more senior investor, you want your portfolio to continue to mature, but you should prioritize security over growth. That may mean, for example, shifting your allocations away from stocks and into bonds.
- Open an IRA. If you have a 401(k) and are maxing out your contribution, as you should be, you can start an IRA as another way to invest. There are traditional IRAs and Roth IRAs, each with their own rules about contributions and taxes. If you have any questions about which is right for you, your financial planner can provide guidance.
- Don’t touch your retirement savings until you have to. While we tend to think of 65 as the age of retirement and the age at which we can start withdrawing from our retirement accounts, there are rules that allow you to dip in sooner. For example, you can actually start making penalty-free withdrawals from your traditional retirement plan or IRA at age 59½. And in some instances, people over the age of 55 who lose or leave their jobs can do the same. However, the longer you wait to tap into those funds, the better your financial picture will be in the decades ahead.
- Keep taxes in mind. Reaching retirement age doesn’t mean you no longer have to pay taxes. Money coming out of your 401(k) or traditional IRA is taxed just like any other type of income. So, you should give some thought to how to minimize your tax liability. For example, some retirees move to more tax-friendly states in order to hang on to more of their retirement income.
Successful Investing Is All About Information and Effort
The information and tools you need to invest wisely and successfully are out there. You just need to leverage them to your advantage. Whether that means educating yourself with the wide range of resources available online or developing a relationship with a skilled and experienced financial advisor, the key is to take action. And that’s true whether you just collected your first paycheck or have said “Goodbye” to work and “Hello” to retirement.