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How Age Impacts Your Investment Decisions

About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals. 

Your mindset and goals continually evolve over time. In your 20s, you might be focused on paying off student loans and saving up for your first home. Your career is just getting started, and thoughts of Retirement are several years away. In your 50s, you're starting to imagine a time when the daily grind of a 9-5 won't be a part of your life anymore — and neither will a regular paycheck. You might also be wondering if you've saved enough for Retirement. Just as your life changes, your investment decisions, and risk tolerance may change as well.

If you're taking the same risky investment approach in your 50s as you did in your 20s, you may be headed for trouble. And for those who are too conservative with decades left until your golden years, you could be leaving money on the table and putting your future Retirement at risk. As you move through the different stages of life, it can be worthwhile to re-evaluate your investment decisions.

Investment Risks Over Time

Generally speaking, the younger you are, the riskier you may decide to make your investment portfolio. Earlier in life, many feel comfortable with a high-risk strategy because they won't be withdrawing investment funds for several years. They have time to recover and recoup from any losses from incidents such as a sudden market downturn.

Someone who's a few years away from Retirement, however, won't have as much time to recover from a plunge in the markets and may decide to maintain a low-risk strategy. If their portfolio relies too heavily on stocks, their entire retirement strategy could be jeopardized. They may not have enough time to recoup their losses and could quickly drain their other resources while trying to wait for the value of their portfolio recover.


When you work with Dream Financial Planning, we'll craft a customized investment strategy that aligns with your preferred risk tolerance. Our free quiz evaluates several factors, such as your portfolio size, goals, and risk tolerance. In addition to explaining your risk score, the quiz will also provide insight into how to match your allocation with your preferences, as well as the performance you can expect based on the amount of risk you decide to take in your portfolio.

Riskalyze is one tool we use to help better understand our clients' risk tolerance. In addition, we take time to get to know our clients so we can understand their relationship with money and help them prioritize what's most important to make sure their portfolio matches their needs.

Risk tolerance - an investor's ability to psychologically endure the potential of losing money on an investment. A person's risk tolerance can change throughout their life and determines what type of investments he or she is likely to make.

Risk Tolerance is made up of two separate components, the ability to take risk and the willingness to take risk.

Ability to take risk - The ability to take risks is evaluated through a review of an individual's assets and liabilities. An individual with many assets and few liabilities has a high ability to take on risk. Capacity or the ability to take on risk measures objective factors like time horizon, age, the need for income, and family situation.

Willingness to take risk - On the other hand, willingness refers to the degree of investment risk one is comfortable taking. If an individual expresses a strong desire not to see the value of the account decline and is willing to forgo potential capital appreciation to achieve this, this person would have a low willingness to take on risk and is risk-averse.

Investing At Various Ages

Along with risk tolerance, your age can also be an essential factor when deciding how much to invest and what types of vehicles to invest in. For example, the higher the percentage of stocks you invest in, the more volatile your portfolio may be. Many may choose to minimize risk and focus on more steady sources of income as they get closer to Retirement.

Investing In Your 20s and 30s

After gaining some stability in your life and career, you may be ready to move your money out of a savings account and into a more active role through investments. With 30-plus years ahead of you before Retirement, your intention might be focusing on growth over time. For those planning on retiring at least 30 years out (past your 50s), I usually recommend investing 100 percent of your portfolio in stocks.

Being this aggressive will allow you to maximize your returns and take advantage of compound returns. Did you know that over every 20 year rolling period since the Great Depression the stock market has had a positive return and outperformed more diversified portfolios. 

For ambitious savers who are interested in retiring early (age 50 or sooner), you might decide to keep that percentage a bit lower to make room for more steady and conservative options. During your 20s and 30s, other common investment options include real estate, employer 401(k) plans, and/or IRAs.

In the last two years, an average of 49% of millennials (ages 23 to 38) held stock directly or through mutual funds, exchange-traded funds or retirement plans such as 401(k)s at any given time, according to polling data that Gallup provided at The Los Angeles Times' request. Read the full Los Angeles Times' story here.

Many millennials that reach out to me are concerned with paying down debt, budgeting for daily living expenses, and starting to save for Retirement. If possible, I always recommend contributing enough to your 401k to get the full match from your company. The reason is that the match is literally a 100% return on your money.  Even a small amount such as $10,000 can turn into approximately $200,000 over 30 years based on historical returns. If your company doesn't offer a 401k or other retirement plan, feel free to reach out to me to evaluate your options.

Investing In Your 40s

As you're inching closer to those peak earning years, your 40s can be an opportune time to double down on steadier investment options. If your employer offers contribution matches to 401(k) plans, contributing the maximum amount now could create a promising payout through Retirement. In general, how you invest in your 40s will vary greatly depending on the types of investment options (if any) were made in your younger years, how close you are to retiring, and your risk tolerance. In general, most people begin shifting their asset allocation to a more conservative strategy in their forties, with stock allocations closer to 60 or 70 percent.

Retirement Planning

How you choose to invest in your 50s will greatly depend on how your current financial picture aligns with your future retirement goals. At this stage, you might be wondering if you've saved enough to retire. We'll help you:

·       Begin the retirement planning discussion and help you figure out how much you'll need to retire.

·       Discuss issues like the timing of taking social security benefits to maximize benefits.

·       Discuss the liquidation of your retirement accounts and brokerage accounts to replace your paycheck and sustain spending during Retirement.

Investing In Your 50s

Take a look at your current income level, nest egg, taxes, and projected retirement income. This could help you determine how aggressive your portfolio should remain throughout your 50s. Why? Because now's the time to focus on creating income for you and your spouse throughout Retirement. Depending on when you plan to retire, today's 50-year-old man is expected to live an additional 31.9 years, while women can expect an additional 35.3 years.1 Incorporating an appropriate amount of risk into your portfolio can help you, and your spouse prepare to experience the kind of Retirement you want.

How you may decide to invest throughout your career can be based on several factors, but it's always important to take your age and proximity to Retirement into account. As you're analyzing your portfolio's asset allocation, diversifying and protecting your future retirement income is essential. Reflecting on your investment strategies can create peace of mind as you get closer to retirement age.

Don't try to time the market 

Trying to time the market is a nearly impossible task. Looking back over the 20 years from Jan. 1, 1999, to Dec. 31, 2018, the S&P 500 return was 5.62% per year. If you missed the ten best days in the stock market, your overall return was cut in half. Six of the best ten days in the market occurred within two weeks of the ten worst days.

Are you ready for Retirement?

This checklist covers 32 of the most important planning issues to identify and consider for someone who is about to retire. Download our Complimentary guide to make sure you're on track for Retirement.

Penalty-Free IRA distributions

We never recommend taking withdrawals from retirement accounts before retirement, but we understand emergencies happen. Download our Complimentary Guide to make sure your withdrawal will be penalty-free.



Your company offers a 401k. Now what?

Early 401(k) Withdrawals at a Young Age: What You Need to Know

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  1. https://www.ssa.gov/cgi-bin/longevity.cgi

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