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To Be A Successful Investor, Act Your Age!
Life is change… and your investing styles during the various stages of your life should change, as well.
As we grow older, for example, we may want our investment strategy to grow more conservative. Of course, every person’s situation is different, and so each one needs a different game plan. However, there are some general approaches you should consider when developing your investment strategy, based on where you are in life, your goals, and your tolerance for risk.
In Your 20s And 30s
Invest for growth. Over the last 30 years, equities have outperformed fixed-income securities*, although past performance is no guarantee of future results. Take advantage of your long-term investment horizon and consider having approximately 70% of long-term savings in stocks and/or stock mutual funds. The balance could be in bonds and bond 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.
* Stocks, Bonds, Bills & Inflation, Year-end 1983-2003, Ibbotson Associates, 2004
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, people under 30 should generally strive to save at least 10% of gross income. For those age 30 and older, the goal should generally be at least 15%. If you are planning to retire early, you’ll probably need to save more (typically 20% to 25% of gross income).
In Your 40s and 50s
Keep investing for growth. You may consider keeping 50% to 60% of your investment portfolio in stocks and the balance in bonds. Then, as you approach retirement, consider following this same strategy, but strive to reduce your level of risk. For example, 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% 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.
Do 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 10-30 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 $1,500,000, 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. Planning for a mortgage-free retirement can free up substantial income to do other things. You should consult with your tax advisor to help plan for this.
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 higher-quality investments 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.
Lee Cravatta, Financial Consultant offers securities through AXA Advisors, LLC (member NASD, SIPC) 325 Essjay Road, Suite 308, Williamsville, New York 14221 and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries. Contact Lee at .
GE-28755 (04/04) (Exp. 04/06)
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