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Financial Strategies
Investing Through Different Life Stages
By Jane Levine
CFP and Registered Principal, Linsco/Private Ledger Corp.
Investing is a lifelong process, and the sooner you start, the better off you’ll likely be in the long run. The first part of that process is developing consistent savings habits. Regardless of whether you are saving for retirement, a new house, or that once-in-a-lifetime vacation, you will need a dedicated focus on saving. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, they are even easier.
Factors That Affect Your Investment Decisions
Once you begin saving on a regular basis, you’ll need to start making important decisions about how to invest your money. Regardless of the financial stage of life you are in, you will need to consider what your investment objectives are, how long you have to pursue each objective, and how comfortable you are with risk.
The answer to these questions will help determine whether you put your savings into investment products that produce income, or that concentrate on potential growth in the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investment strategy should primarily focus on growth until you are close to retirement. After you retire, you’ll want to draw income from your investment while keeping your principal intact to the extent possible.
Time and Risk Tolerance
All investing involves a certain amount of risk. In determining the amount of risk your investments should carry, weigh your ability to tolerate price fluctuations against your need to earn a certain rate of return. Keep in mind that time plays an important role in this decision. For a retirement that is 30 years away, you can probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments.
But what about less predictable investing scenarios? For instance, let’s say you are 40 and expecting your first child. You’ll need to decide how to balance your finances to account for the additional expenses of a child. Perhaps you’ll need to supplement your income with income-producing investments. Moreover, your child will be entering college at about the same time you’re ready to retire! In this situation, your growth and income needs most certainly will change, and possibly your risk tolerance as well.
Investing for Life Stages
The following are some major life events that most of us share, along with some investment decisions that you may want to consider:
When you get your first “real” job:
Start a savings account to build a cash reserve.
Start a retirement fund and make regular monthly contributions, no matter how small.
When you get a raise:
Increase your contribution to your company-sponsored retirement plan.
Increase your cash reserves.
When you get married:
Determine your new investment contributions and allocations, taking into account your combined income and expenses.
When you want to buy your first house:
Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing, and moving costs.
When you have a baby:
Increase your cash reserves.
Increase your life insurance.
Start a college fund.
When you change jobs:
Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package.
Consider your distribution options for your company’s retirement savings or pension plan. You may want to roll over money into a new plan or an IRA.
When all your children have moved out of the house:
Boost your retirement savings contributions.
When you reach 55:
Review your retirement accounts’ asset allocations to accommodate the shorter time frame for your investments.
Continue saving for retirement.
When you retire:
Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial advisor.
Review your potential combined retirement income and reallocate your investments to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years.
Discipline and a Financial Advisor Can Help
One of the hardest things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you can meet your investment goals. Also if you’re not fascinated with investing, it’s probably difficult to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial advisor can go a long way toward helping you practice smart financial management over your entire lifetime.
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