Asset Allocation by Age: How Does It Affect Retirement?

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Thinking about retirement planning when you’re young is key to financial security in your golden years. Small contributions when you’re younger make a difference in your retirement strategy. The latest Gallup Poll shows that many Americans worry about retirement — only 43% of non-retired individuals say they expect to be comfortable in retirement. Engaging in strategic retirement asset allocation no matter your age will help you ease into the latter years of your life. 

Overview: What Is Asset Allocation?

Asset allocation is an investment strategy that divides your investment portfolio by asset types. Categories of assets include the following:

• Bonds
• Stocks
• Cash and cash equivalents
• Real estate
• Commodities
• Other derivatives

Each asset class has a level of risk to keep in mind so you allocate resources to the right investment at the correct age. When you’re younger you’re more likely to allocate money to stocks, while older investors may choose to shift their strategy to investments in bonds and cash. 

Here’s a look at the ideal retirement asset allocation for different age groups.

How Retirement Asset Allocation Changes by Age

It is helpful to think about asset allocation during each stage of your life. Here is a snapshot of what investments you should prioritize during each age range: 

In Your 20s: Ability To Take Risks 

Since you’re young, you have the ability to take risks. You have the option to leverage time and allow funds to grow.

Many in their 20s likely are working for companies that offer a 401(k). A 401(k) plan is a tax advantaged retirement account where an employee makes contributions. In many companies, employers will match a portion of the funds you contribute into your 401(k). 

Another option is setting up an individual retirement account (IRA). 

In 2024, the IRS has set the following limits: 

• $7,000 for individual contributions for IRA account.
• $23,000 for individual and employer contributions to a 401(k) account. 

If you’re in your twenties, you can choose asset allocation of 80% into stocks and 20% into bonds within your 401(k) plan. 

Also, some portion of your allocation portfolio should include money for emergency funds. 

In Your 30s: Build on Your Investments

You’re likely forging forward in your career, but that doesn’t mean you can ignore your retirement strategy. As you move into your thirties, there is a high likelihood you may dedicate funds to a mortgage or start a family. 

In terms of asset allocation, you should still contribute to your 401(k). The asset allocation can still swing heavier toward stocks because you’re young. You also, though, might want to contribute to bonds as it balances out stock volatility. 

Given that you might have a mortgage and a family, it is a good idea to allocate a portion of your portfolio to liquid assets. Investing in cash equivalents like a money market fund can add a diversified element to your portfolio. 

During your thirties, for an additional diversification layer, consider sound real estate investments too. You still want to focus on growth, but with an eye toward mitigating risk. 

In Your 40s: Eye Toward Retirement

During your forties, you likely need to slow down on risk because retirement is on the horizon. It is a good idea to review the allocations in your portfolio. Stocks may still remain a staple in your portfolio. Allocate about 60% to 75% of your portfolio to stocks that have performed well for you in the past. 

Allocating about 15% to bonds can provide a steady stream of income and reduce the volatility of your stocks. 

At this point, you should also be maxing out contributions to your 401(k) and have a sizable stash in your emergency fund. 

If you’re open to diversification, you can look to real estate investments, commodities and cryptocurrency. However, keep in mind, these are riskier investments but could provide aggressive growth. 

In Your 50s and 60s: Keep a Lower Risk Portfolio 

In your fifties and sixties, revisit your portfolio and readjust riskier investments if necessary. You should ideally have 40% to 50% in stocks. Your tilt should be toward lower volatility stocks and potentially dividend paying stocks. 

Your investment strategy should include bonds. You can have a mix of different types of bonds, including corporate and government bonds. These types of investments offer stability and a moderate return on your investment. 

Also, cash and cash equivalents should be kept as options. Here are a few to consider:

• Mutual funds
• Interest-paying savings accounts
• Short-term CDs

70s and Beyond: Retirement

In your seventies and beyond, you will likely be able to collect on social security benefits and in some cases, a company pension. 

Stocks will continue to play a role in your portfolio. However, they should represent only 30% of your portfolio. There should be a continued emphasis on dividend paying stocks and lower volatility investments. 

The shift in focus toward steady growth means leaning more heavily on bonds. Bonds offer capital preservation and a steady source of income. 

In addition to these investments, you will need to start taking your required minimum distributions from your IRA accounts. These funds will also offer a steady stream of retirement income. 

How Market Impacts Asset Allocation

In order to adopt a holistic approach to your asset allocation, you need to consider what is happening in the market. Make adjustments in your portfolio accordingly. 

Here is how certain market factors may impact your asset allocation: 

Market Volatility 

You certainly want to take a look at how the market is doing when managing your asset allocation. If the market is swinging toward volatility you may want to shift your allocation of stocks to bonds. 

Interest Rates 

If there are higher interest rates, you may want to invest heavily in bonds to receive a greater yield in your investment. Bonds are safer for stable income in a high interest climate.

When the interest rates are lower, consider increasing stocks and other alternative investments.

High Inflation 

Purchasing power tends to decrease during periods of high inflation. During this time, you should look into investing in commodities or real estate. Diversification can help portfolios when inflation is having a negative impact on cash and traditional bonds.

Final Take

Asset allocation, ideally, tends to evolve as you age. At every stage of your life, you’re looking to balance aggressive growth with managing risk.

• In your twenties and thirties, maximizing stocks supports growth as long as you can bounce back from market dips.
• In your forties, you want to strike a balance between investing in stocks and also adding bonds to the mix. It is also a good idea to keep a health emergency fund for unexpected expenses.
• During your fifties and sixties, your lens should focus on risk management with a greater allocation of liquid assets and bonds. You want to preserve capital as much as you can during the latter years of your life.
• As you move past your seventies and beyond, you likely will want to have a smaller allocation in stocks, maintain growth and combat inflation.

Revisiting your investment portfolio regularly as you move toward retirement is a good strategy to keep in mind at any age.

Takeaway

Finding and working with a financial advisor is a great idea. A financial advisor will help keep track of your finances and assist you in attaining your financial goals. While finding the right one can be overwhelming, you can decide to work with a financial advisor in your community or a virtual one.

Get to know your financial advisor options today for free!

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