Each phase of your life calls for new ways to protect your money, ensure liquidity, and keep growing for the future.
With Americans living longer and switching careers more frequently than ever, there’s unprecedented time and freedom to reinvent oneself, try new experiences, and take exciting, calculated risks at every age. Yet that freedom requires individuals to thoughtfully and carefully plan their financial moves at every phase, whether you’re just starting out or are well into retirement.
Standard stock-to-bond ratios that made sense in the age of predictable 40-year careers at a single company no longer apply. Today, saving and investing for long-term growth should be more customized and personal, says Alan McKnight, Chief Investment Officer for Regions Asset Management. While the general rule of becoming more conservative as retirement approaches still holds, he says, “it’s really about understanding your personal financial goals and the risks you are able to take to achieve them, and then setting a plan to get there.” A “playbook” suited to each decade of your life can help.
Your 20s and 30s
Today’s graduates can expect to change jobs four times by age 32, twice as often as those who graduated during the late 1980s.1 Millions more won’t take formal jobs at all but will instead enter the “gig economy” as freelancers. All of which only underscores the importance of developing a solid financial foundation and habits on which to base a career path that may be anything but predictable.
Though your starting salary may be low, sign up for your employer’s 401(k) plan, if one is offered, and contribute enough to gain any company match. If your employer doesn’t have a plan, or if you’re self-employed, consider starting a traditional or Roth IRA. Contributing pre-tax earnings to an IRA helps you save more, and small contributions now can make an outsize difference later on as your savings, if reinvested, compound and potentially grow.
“The earlier you can start, the more compounding can benefit your savings,” says Brandon Thurber, Director of the Investment Research Group for Regions Asset Management. Don’t wait until you’re in your 30s to start saving, Thurber says, because “losing an entire decade of compounding can be extremely difficult to overcome.”
Another lifelong habit is learning to budget. “Overspending is a trap that young people sometimes fall into,” says David Franklin, Portfolio Manager for Regions Asset Management. Building an emergency cash fund could help you avoid high-interest credit card bills or disrupting your long-term investments when unexpected expenses arise.
As you advance into your 30s, increase your savings contributions while your salary grows. By now, you’ll likely be thinking about big-ticket goals such as starting a family or buying a home. And, even though it’s decades off, now’s the time to start thinking about the retirement you envision for yourself.
Investing: While conventional wisdom holds that a mix of stocks and bonds is appropriate for all investors, those in their 20s and 30s may want to consider an all-stock portfolio, Thurber says. “Your long-term investing horizon allows you to take on more risk,” he adds. But even with all or mostly stocks, diversifying is important, Thurber says. For example: Consider a range of U.S. and international stock funds. Don’t invest in just one company.
Your 40s and 50s
“These are likely to be your prime earning years,” McKnight says. “So it’s really a critical time to save and invest as much as possible.” Just as important, he adds, is thinking carefully about what you’re trying to achieve—from retirement, to college educations for your kids, to a new business venture, or even buying a vacation home.
Education and retirement are necessities, McKnight says. “On the other hand, a beach house is totally discretionary.” Thus, while your retirement investments may emphasize conservative growth and principal protection, you might be willing to take higher risks when investing toward that second home—with the expectation that higher returns could enable you to buy your dream house.
Even within a broad concept like retirement, there’s room to plan and invest toward specific preferences. A careful analysis of your income, assets, expenses and other goals might reveal that retiring at 62 would require you to take on higher risks with your investments. If that makes you uncomfortable, “you may have to make trade-offs,” McKnight adds—for example, scaling back on your current expenses, adjusting your other goals or adding a few more years to your retirement date.
Investing: Now that you have less time until retirement to recover from a potential stock downturn, bonds can provide ballast for your portfolio. But work income most likely means you don’t need immediate liquidity from bonds, Franklin notes, and “you may want to have more stocks in your portfolio to generate more growth.” For those necessary goals such as retirement, stocks may be more heavily weighted toward large, lower-risk U.S. companies, while more aspirational goals may call for stocks with a higher risk and reward profile, such as emerging markets.
Your Regions Wealth Advisor can talk with you about other approaches that may help you mitigate market swings if they’re appropriate for your situation.
Your 60s and beyond
If you’re heading into or are already in retirement, a top priority, of course, is replacing work income. “It used to be that you could just buy bonds at whatever level you needed to match your liabilities,” McKnight says. “Today, that’s really difficult to do.” Bond yields have been stuck in low gear for years—a situation that’s not likely to change even though interest rates have begun to rise, McKnight says.
Longer lifespans also make it important to keep some of your portfolio in stock and other growth-oriented investments, McKnight says. Over the years, as you begin to draw down on your investments to meet living expenses, your wealth advisor can help you structure an appropriate plan. That may mean taking only required minimum distributions from tax-advantaged savings plans, and tapping other resources first. “It often makes sense to let tax-deferred accounts grow for as long as possible before taking distributions,” Franklin says.
Investing: As an alternative to low-yielding government bonds, investors seeking income in retirement might look to high-grade corporate bonds, which may offer higher yields at slightly higher risk. “We think that companies are in good shape and they have high cash levels, strong balance sheets,” McKnight says. Other potential sources of income may include dividend-paying stocks, or more specialized investments such as master limited partnerships. (See “Where to Find Income When Rates Stay Low”)
Help for the journey
Looking out toward a long lifetime of saving and investing, and planning for all of the unexpected twists and turns may seem daunting. Fortunately, this is not a journey you need to undertake alone. “Until you really start to talk with your spouse or partner and your children, you may not know if you’re truly on the same page with your most important goals,” McKnight says.
Your Wealth Advisor can be an essential partner in this process, McKnight says. “It’s incredibly valuable to sit down at each stage and say, okay, where do we stand? Together, you can explore and identify the paths that you’ll need to take to achieve your goals.”
