Investment strategies by age

Your plans and goals change as you move through your life. So, too, should your investing strategy. Here’s some guidance for how to invest at every age.

No matter how old you are, the end game of investing is to achieve a return on that investment. But how you get from A to B depends on many different factors, including your timeline, risk tolerance and financial goals.

One of the most important things to consider is how to invest at every age. The “rule of 100” is sometimes used in determining an age-based asset allocation. Subtract your age from 100, and that is the percent of stock generally recommended to have in your portfolio (e.g. if you’re 20, then 80% if your investment portfolio would be made up of stocks).

As people are living longer and spending more time in retirement, you may want to subtract your age from 110 (used in each scenario below) or even 120 to determine your asset allocation. This calculation would allow you to maintain more of your portfolio in stocks for a longer period, increasing your potential for growth. However, each person’s asset allocation mix should reflect their risk tolerance and investment goals.

Read on for suggested investment strategies by age.

Investing in your 20s

In your 20s, you’re at the very beginning of your adult life. You’re probably embarking on a career, learning to manage expenses and maybe even thinking about buying a condo or house. While retirement probably feels far away, one of the smartest moves you can make financially in your 20s is to start investing for your long-term financial goals.

There are a few reasons for this. For one thing, starting to invest early means your portfolio can handle more risk and withstand short-term market volatility to generate returns over time. You’ll also reap the benefits of compound growth, boosting your investing power and building a strong foundation for your future.

One thing to note: Before you invest any money, be sure you won’t need it for living expenses, such as rent, food and utilities. It’s also a good idea to start saving into an emergency fund so you’re covered in case of unexpected expenses.

Here are some tips for how to approach investing in your 20s.

A potential asset allocation mix when investing in your 20s

• Stocks: 90%
• Bonds: 10%

Build a financial base

Two words: compound growth. Money you invest in your 20s will benefit from decades of interest. Consider this hypothetical example: $10,000 invested at age 25 — with a 6% return, compounded annually — can net you $109,000 at age 65.

Be aggressive

Allocating most of your investments to stocks can be risky, because equity investments are generally more volatile than bonds. But stocks may also have more potential for growth, and in your 20s, your portfolio has more time to recover from any potential losses.

Join an employer-sponsored retirement plan

If you have access to one, investing through an employer retirement plan, such as a 401(k), SEP or SIMPLE IRA, is the easiest way to save for your future. Contributions are directly withdrawn from your paycheck, and many employers will match those contributions up to a certain amount, too.

If it’s available, selecting a target date fund option can help keep your asset allocation in line with your age. And don’t forget about your 401(k) when you change jobs.

Open an IRA

If you have a little extra money to invest in your future each month or don’t have access to a 401(k), a traditional individual retirement account (IRA) or Roth IRA is another way to help you save for retirement.

A Roth IRA may be a particularly good choice early in your career, and here’s why: Roth accounts are funded with after-tax money, and you can withdraw the earnings tax-free after age 59 1/2. If you’re currently in a lower tax bracket than you expect to be at retirement, investing in a Roth IRA in your 20s could mean you pay less tax on that money overall. 

Pay down debt

You should pay off high-interest credit card debt first, but paying off lower-interest student loans may also help you save and invest more in the long run.

Investing in your 30s

You’ve got plenty of time until retirement, but be sure to take your current needs, risk tolerance, and any changes in your financial circumstances into account when you’re assessing your investments.

For example, if you’re earning more money, you might want to consider contributing more of it to your employer retirement plan, if you have one.

Here are some things to think about when investing in your 30s.

A potential asset allocation mix when investing in your 30s

• Stocks: 80%
• Bonds: 20%

Focus on the long game

You’re still decades away from retirement, so you may want to continue allocating your portfolio primarily to stocks.

Also, try to increase your contributions to an employer-sponsored retirement plan (401(k), SEP or SIMPLE IRA) or a traditional or Roth IRA by at least 1% each year. And don’t forget about a Health Savings Account (HSA) if you have a high-deductible health insurance plan. You can fund an HSA with pre-tax or tax-deductible contributions, and it will grow tax-deferred and can be used tax-free for qualified medical expenses before and after retirement. While there are annual contribution limits, an HSA can move with you through employer changes and into retirement.

Factor in other financial goals

This is a good time to start setting aside money for other goals, as well. For example, if you want to buy a house, consider saving up to 20% of the purchase price for a down payment. The more money you put down, the less you’ll pay in interest, fees and monthly mortgage costs. 

Work on your emergency fund

The general rule of thumb is to have three to six months’ worth of your household income set aside for emergencies, such as job loss or medical bills. Consider aiming for more if you work in a high-turnover industry or are self-employed.

Think about family finances

If you start a family, consider planning for your children’s financial futures — even as you budget for the day-to-day costs of having children. A college savings plan, such as a 529 plan, can help pay for qualified education expenses, including private K-12 tuition.

Investing in your 40s

In your 40s, your career is likely well established, and your children, if you have them, might be old enough to start thinking about college. Suddenly, retirement doesn’t seem so far away, even though you may have a couple of decades of work left.

Now is the time to maximize your retirement savings contributions, if possible, and assess your mix of investments to ensure your level of risk is appropriate for your time of life.

Consider these strategies when investing in your 40s.

A potential asset allocation mix when investing in your 40s

• Stocks: 70%
• Bonds: 30%

Mix in moderate risk

As your investment portfolio grows, consider allocating more funds to fixed-income investments, such as investment-grade bonds. Though these may offer less gains, they may also experience less volatility than equities. Lowering your risk slightly in your 40s may help keep you on track for retirement.

Take full advantage of your 401(k)

Work to max out your contributions to your employer retirement plan. Make sure you’re taking advantage of an employer match if it’s offered, and if possible, try to contribute up to the IRS limit each year. If you have an HSA, consider maxing out your contributions here, as well.

Broaden your portfolio

If you’re maxing out contributions to your retirement accounts and have extra income to invest, consider opening a brokerage or automated investment account.  

Pay down your mortgage

Your mortgage may have many years left on it, but if you have extra money, you could chip away at the principal and reduce what you pay in overall interest. Alternatively, you could keep your mortgage as it is and use that extra money to invest for retirement. You may still have 20+ years of your working life left, and the power of compound interest will boost any extra 401(k) or IRA contributions you make.

Investing in your 50s

By the time you hit your mid- to late 50s, you’re only about a decade away from retirement. If you have kids, they may be living on their own, potentially leaving you with extra income that you could invest. Now’s the time to move into less-risky investments and take advantage of additional allowed contributions to your retirement account.

Here’s what to think about when investing in your 50s.

A potentialasset allocation mix when investing in your 50s

• Stocks: 60%
• Bonds: 40%

Maximize your contributions and lower risk

Consider reallocating a bit more of your portfolio to investment-grade bonds. Now is also the time to start thinking about boosting your retirement fund contributions and taking advantage of catch-up contributions to your 401(k) or IRA. 

Think realistically, envision your retirement costs

When you’re around 15 years away from retirement, you can start to envision your costs in retirement. Build a clear budget to see just how much more you need to save to build the retirement you want.

Consider downsizing

Your late-50s may be a good time to downsize to a smaller home as you prepare for retirement, which could leave you with extra cash to invest. Even though compound interest won’t benefit you as much in your 50s as it would have earlier in your life, it’s still important to make your money work as hard as possible as you approach retirement.

The money you save by downsizing could go toward 401(k) or IRA catch-up contributions, your HSA or putting into your brokerage account.

Investing in your 60s

Consider your early 60s a test run for retirement. You’ll want to plan your retirement distributions for maximum tax-efficiency and prepare mentally, and financially, to live on a fixed income. Before and after retirement, your investments should also be fairly low risk to ensure you have the retirement income that works for your lifestyle.

Read on for tips for investing in your 60s. 

A potential asset allocation mix when investing in your 60s

• Stocks: 50%
• Bonds: 40%
• Cash and cash equivalents: 10%

Maintain low risk

You may want to include more fixed-income bonds and even cash and cash equivalents (such as certificates of deposits (CDs) and money market accounts) in your investment mix to lower your market risk and create a steady income for your distributions. However, keeping some money in stocks can help keep your portfolio diversified and protect your savings from the impact of inflation.

Plan your retirement income withdrawal strategy

While the “4% rule” may be the most common strategy, how you withdraw your retirement income isn’t a one-size-fits-all solution. Make sure to factor taxes, other income sources and life expectancy into your plan.

If you’re able, try living off your projected income for a few months prior to retirement to see if your strategy will work for you long-term.     

Consider your legacy and next generations

Well before your 60s, and especially if you have dependents, you should have the basics of your estate plan mapped out, such as your will and other estate documents. Make sure to review your estate plan regularly or after a major life event to ensure it still meets your intentions.

 Once you’ve reached retirement, starting your wealth transfer and yearly charitable giving may help lower the tax burden for your estate.

Take the investing options quiz, offered by U.S. Bancorp Investments, to get actionable insights into what type of investing suits your timeline, risk tolerance and financial goals.