Some of the most common financial advice you can receive regarding preparing for retirement is to contributing to a 401(k) plan, and usually, thanks to your employer, putting a portion of your earnings toward that plan every paycheck is easy. But where your money is being invested and at what age you’re investing it matters, so it’s important to assess the best 401(k) strategies available to you as you get older.
In your 20s and 30s
When you’re in your 20s or 30s, you still have a lot of time ahead of you before you retire, which allows you to take on more risks for higher rewards. “The basic rule of thumb is that a younger person can invest a greater percentage in riskier stock funds,” personal finance expert Carol M. Kopp explains in an article for Investopedia. “At best, the funds could pay off big. At worst, there is time to recoup losses, since retirement is far ahead.”
Try to contribute 10 to 15 percent of your salary toward your workplace 401(k) as well as contribute more, if you’re capable, to a Roth IRA. While young, you should look to invest in long-term stock investments, which have been shown to return more than bonds. “While bonds are more stable, you won’t beat stocks if you’re looking to multiply your money over the long-term,” says Barbara Friedberg, a former portfolio manager and university investments instructor. A good place to start is to invest about 75 percent in stock funds and the rest in bond and cash investments.
In your 40s
As you age, you should begin to lean toward slightly lower-risk bonds and fixed investments than in your 30s. There’s no fixed ratio of stock-to-bond allocation that you should follow — it all depends on how comfortable you are with risk. If you’re an aggressive investor, you may still wish to invest about 70 percent in stocks, but if you’re more conservative and prefer to avoid risk, then nudge your stock allocation down to around 60 percent. “Just remember, the more stock holdings you have, the more volatile your investment portfolio,” Friedberg says.
If you didn’t invest toward retirement in your 30s and are just getting started, you should look to supercharge your savings and reach the maximum $18,000 annual investment allowed. If you do this at age 40, your nest egg will still reach a million dollars by the time you reach age 67. It still won’t be as good as if you had started young, but it’s a good place to start.
In your 50s and older
As you get closer to retirement, you should continue to take more of your stock investments and put them in bonds and cash investments. “The specific percentages will be determined by how much and when you anticipate dipping into your investments,” Friedberg says. She explains that if you expect to retire at 67 and receive Social Security and other income sources, you can delay spending your investments and therefore continue being more aggressive with them. Remember that you will keep investing even during retirement, and that you need to take your own life expectancy into consideration. For example, women are incentivized to invest more aggressively in their retirement because they live about five years longer than men on average, leading to higher retirement costs.
In fact, the rising life expectancy has led some financial planners to throw the old rules straight out of the window, as retirement money now needs to last longer than ever. To make the most of your income today and optimize your 401(k) strategies for the future, make sure to seek assistance from a certified financial planner at your local financial institution.