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Age Based Investing for Retirement

Source: Photo: lumix2004

There are a number of strategies that you can follow as you attempt to reach your retirement goal. One of these strategies is investing based on your age. This is especially popular for those planning retirement. By creating an investment plan based on age, it is possible for many to shift their asset allocation in an orderly manner as they approach retirement. However, it is important to realize that age based investing for retirement should not rely entirely on lifecycle funds that are so popular today, in part because so many 401k plans offer it. Creating a retirement investment plan based on your age is not the same thing as handing your financial well-being over to a lifecylce fund that claims to allow you to “set it and forget it.”

Principles of Age Based Investing for Retirement

Creating an investment plan is one of the basic activities that is likely to help you chart a course to a successful retirement. You can base this plan on your age, and how many years you have until retirement, transitioning your investment portfolio to more conservative investments as you near your retirement age.

Conventional wisdom says that you should invest more in stocks and other growth investments when you are younger so that you have time to make up for short-term losses with long-term gains. The idea is to build as big a nest egg as you can during your younger years, and slowly shift your assets into investment with less risk (like bonds) as you near retirement and become more interested in preserving what you have while attempting to keep pace with inflation. One of the basic rules of thumb for this scenario is to subtract your age from 100. The answer is how much of your portfolio should be in growth investments like stocks. For example, I’m 30. 100 – 30 = 70, so conventional wisdom says that I should have 70% of my investments in stocks.

However, you shouldn’t rely completely on conventional wisdom when investing for retirement, nor should you blindly follow some rule of thumb. Instead, you need to build a road map to your desired retirement outcome by considering the following factors:

  • Risk tolerance (financial and emotional)
  • How much money you want
  • The income you need to cover expenses in retirement
  • Possible income streams you can cultivate
  • How many years you have until your desired retirement age
  • Likely returns on your investments, depending on asset class

You should also consider what could happen if we see a stock market crash just before you retire. This is one of the reasons that people slowly move their assets into bonds and cash as they get closer to retirement. That way, if the stock market crashes or the economy gets too volatile just before retirement is reached, the damage is limited to a smaller portion of the portfolio. It is important, though, to realize that you will still need to keep some of your assets in growth investments, even in retirement. You don’t have to follow the conventional age rule if you are not comfortable with it, but a portion of your portfolio should still be growing at a solid rate in order to help you maintain a nest egg that won’t run out.

Lifecycle Funds

One of the more popular investment products these days is the lifecycle fund. A lifecycle fund is a managed mutual fund that automatically adjusts your assets for you, depending on your age. The fund manager chooses a higher concentration of growth investments while you are younger, and then shifts the allocation as you near retirement. You can choose lifecycle funds built around different goals, and different lengths of time.

As tempting as it might be to “set it and forget it” with a lifecycle fund, you need to be careful. Numerous studies have shown that many managed funds don’t fare any better than their less-pricey counterparts. Additionally, you have to consider that the costs associated with lifecycle funds can eat into your returns, leaving less money in your pocket. In many cases, you can do just as well – or better – by creating your own plan, and using index funds and/or ETFs to invest in a wide range of asset classes, tweaking your allocation as you age.

In the end, age based investing works best when done for retirement. It can be a good way to build your nest egg and then manage it as you get older. But you are probably better off creating your own plan, based around your individual goals and situation, rather than relying on a lifecycle fund.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

8 Responses to Age Based Investing for Retirement

  1. when you grow older it is best to gradually move away from active investing and put more and more of your money in passive investments like index funds and the like because let’s face it, the more you are the more your mental faculties go south… unless you are warren buffett

  2. Nice posting…thanks….There are several advantages and disadvantages with age based funds….The bottom line here is to realize that these age-based funds offer some great advantages for those who prefer a hands-off approach. These funds are not for everyone though. Even if you decide to invest in an age-based fund, it is wise to do as much research as you can to compare your available options. Compare fees that are offered and check out what they say about funds offered to you at Morningstar or other similar research sites.

  3. @kt that is horrible advice, you have no idea what you are talking about. Please go play in traffic and prove Darwin right once and for all

  4. this is something they taught me in finance school in college. Depending on your age you should be at different levels of aggressive vs. conservative.

    my though is unless you take risks you will not make money so you make the call.

  5. Thanks for this info. I’m kind of young, but my husband earns most of the money and he’s 9 years older than me, so it’s time for us to start seriously thinking about retirement.

  6. The general thought is the younger you are the more risk you should and are able to take. The theory then becomes you have more time to recover if you lose money but also have the greater chance for returns. The problem I notice with a lot of people though is that they don’t start until late and are afraid to take risks which means their money is better off in a savings account.

  7. How well you are able to handle the equation of risk and rewards makes all the difference when it comes to investments. Though my retirement date is years away, I’m actively looking for ways I can max out my retirement saving so that I can do everything on my ‘retirement wish list’ 🙂

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