Knowing how to manage your money at different stages of your life can ultimately help you secure a comfortable retirement. Here’s the 101.
If you’re already planning for retirement (which you should as soon as you start working), you’re most likely interested in how investing can help you achieve your retirement goals. After all, passive income is not just nice to have, but essential if you want to retire early and achieve financial freedom.
However, just like there is no one-size-fits-all investing strategy for everyone, there is no one-size-fits-all for every stage of your life either. How you manage your finances at the various decades of your adult life will determine whether you reach your retirement goals. The financial strategy you employ in your 20s and 30s will no longer work when you start approaching or are in retirement.
So here’s a how-to guide on asset allocation at every age to hit your retirement goals.
What is asset allocation?
There are three main asset classes (i.e. investment categories): cash, equities (stocks), and bonds (fixed-income securities). Others include real estate, commodities, options, futures and other derivatives. Different asset classes have different levels of risks and returns. Each class therefore behaves differently in different situations and over time.
For instance, when the economy is flourishing, confident investors would allocate more funds to stocks than, say, bonds, since stocks offer higher earnings potential. Conversely, when the markets are down, investors become less confident and would rather invest in bonds rather than stocks, which now seems riskier.
Bonds can help to level out the volatility of stocks, which is why it’s important to never put all your eggs in one basket (i.e. all your money into one asset class). That way, you can protect your capital if one asset class underperforms. A diversified portfolio is key, so be sure to invest in a variety of asset classes.
The arrangement of those assets in your portfolio is known as asset allocation—and that varies based on your age and time horizon up till retirement.
Asset allocation at different decades of your life
Various life stages require different asset allocations.
Regardless of your age, you must first have at least six to 12 months’ worth of emergency savings readily accessible.
A trusted financial advisor—or even an online broker—can help you figure out your risk profile to determine how aggressive or conservative your investing style is. They will then make recommendations based on that information, and you can decide what investment approach you’re comfortable with, depending on your specific circumstances, e.g. saving up for your child’s education, having multiple dependents, etc.
(Note: The following recommendations do not take into account your risk profile or individual circumstances.)
In your 20s
Having just graduated from university, your primary focus should be to pay off all your university loans. Then, start building your emergency fund, getting sufficient insurance coverage, and dipping your toes into investing.
For most of us, the beauty of being in our twenties is that not only are there little to no commitments, there is the benefit of a long time horizon—which means there is more time to learn and recover from mistakes. Thanks to compound interest, what you invest in yours will have the greatest possible growth. Your investments will also have more time to weather the volatility of the market, so you can focus more on aggressive growth assets like equities while allocating a small percentage to slow-growing assets such as bonds.
In your 30s
Say you decided to put off investing during your 20s in order to pay off your university loans, or you had to take extra time to settle into your career. Thus, you only start putting money away in your 30s. No sweat—you are still young enough to reap the benefits of compound interest, and now you can invest 10% to 15% of your income.
You may have more milestones to achieve in life, such as starting a family or buying your first home. But building your retirement fund should still be a priority. With about 30 active working years left, your 30s is a good time to maximise your contribution to your retirement fund. Hold on to those growth assets, but also start adding more bonds to your portfolio as you start to build your post-retirement safety net.
You might also want to consider investing some of the funds from your CPF Ordinary Account (OA) to earn higher interest than the 2.5% the OA is offering. Your 30s is a good time to do this as you would have accumulated some savings in your CPF by now (assuming you’re traditionally employed) and you still have time to weather out the market as you grow your wealth.
In your 40s
Now that you are at the midpoint of your career, you are likely reaching your peak earning potential. However, this is also the decade where you’re ‘sandwiched’ between the twin commitments of raising your children and taking care of your parents.
If you’ve been putting off saving for retirement or only managed to start now–or even if you’re on track—it’s high time to buckle down on portfolio building. Whether you are still paying your mortgage or saving up for your children’s education, you still have time to catch up on your retirement savings. If you have a life partner, consider planning for retirement together. This is also a good time to rebalance your investment portfolio to stay on course towards your retirement goals.
However, note that aggressive doesn’t mean impulsive. Stick with investments that have a solid track record of generating returns and avoid those that seem too good to be true.
In your 50s and 60s
As you’re getting closer to actually needing your savings, instead of risking your retirement savings in the latest stocks, you’ll need to be more conservative and look to more stable products such as unit trusts and bonds.
Review your investment portfolio regularly and ensure that it balances your need for growth, income and stability to secure you for post-retirement life. Start by calculating the amount you will need monthly to cover all your expenses, and work out from there how you can readjust your portfolio.
In your 70s and beyond
You’re likely retired by now, so it’s time to shift your focus from wealth accumulation to capital preservation (and wealth distribution). However, don’t be in a hurry to cash out all your stocks. Instead, focus on dividend-generating stocks and your bond holdings.
At this stage, you’ll also be collecting your monthly CPF payouts, so be prudent in your expenses and set aside what you need for a stable and secure retirement.
Regardless of how old you are, the best time to start investing is yesterday. However, it’s never too late to get started. Making appropriate investments at the right time is key to building a strong financial future.
Discuss with your life partner—if you have one—and a qualified financial advisor on the best way to allocate your assets and develop your financial portfolio, so that you can plan for a comfortable retirement.
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Sub-editor by day and author by night, Joyce is keen on everything related to investments and macroeconomics, and where to find the best croissant in town. Her writing can be found at Harper’s Bazaar Singapore, Her World and more.