You’ve heard it again and again: Investing is key to boosting your retirement savings. What you might not have heard is how much you should actually be investing.
Many experts recommend that you invest 10%-15% of your monthly income towards retirement. However, this number can fluctuate depending on different factors. Here’s an overview of what you might want to invest according to:
YOUR AGE
When it comes to investing for retirement, time is your biggest ally. This means that young investors, such as recent college graduates, should invest whatever they can—even if they aren’t able to reach that 10%-15% goal.
If, for whatever reason, you’ve needed to put off investing in your 20s, your 30s is when you should start. Most 30 year olds are young enough to experience the benefits of compound interest, and they’re typically old enough to contribute the full 10%-15% amount.
In your 40s, you’re still a ways off from retirement, but this is when most people begin to get all of their ducks in a row. This means that if you haven’t started investing, now is the time to buckle down. Ideally, you’re able to contribute above 15% of your income, and you should generally be investing in more aggressive assets. If you’re already on track with your investments, focus on building up your portfolio.
As you approach retirement age (your 50s and early 60s), consider switching to more conservative investments to avoid putting all of your money on the table. If you need to play catch up, the IRS allows you to invest higher amounts of your income at this age (also known as catch-up contributions). This is also a good time to start thinking about when you actually plan to retire.
No matter how old you are, sound advice from a qualified financial advisor can go a long way in ensuring you’re setting yourself up for investing success.
THE TYPE OF INVESTMENT
There are many rules of thumb regarding asset allocation. One of the most common says the percentage of bonds in which you invest should equal your age. For example, if you’re 25, your portfolio might include 75% stocks and 25% bonds. If you’re 55, your portfolio might include 45% stocks and 55% bonds. The idea is that as you approach retirement age, you want to begin sheltering from drastic market changes, which means investing more in bonds as they tend to be lower risk.
However, every individual’s financial situation, and their risk tolerance, is different. For a more detailed look at how different allocations could impact your unique investment goals, consider consulting with a financial advisor.
THE PURPOSE OF THE INVESTMENT
Long-term goalsÂ
Long-term goals typically include major milestones, such as retirement. With a longer time horizon, investors are more capable of weathering market fluctuations, meaning they can often allocate more assets in higher-risk investment classes. While specific allocations will depend on your financial situation, this is generally when you’ll want to strive for that 10%-15% investment goal.
Short-term goals
Whatever your short-term saving goal is, be it preparing for a wedding or a down payment on a house, your strategy should usually be low risk, high security. If you’ll need the cash in a year or less, the safest route is often to keep your money in a high-yield savings account. If you have some more time, consider investing bonds with a low duration. Because short-term goals involve a known future expense, you can calculate a general amount you’ll need to save monthly or annually to reach the needed total.
Tips to Boost Your Investment Returns
MATCH & MAXIMIZE
If you have room to increase your 401(k) and IRA contributions before hitting the annual limit, it may be a good idea to do so. In addition to boosting your retirement funds, you’re able to reduce your taxable income.
Even if you can’t reach your personal contribution limit, maximizing your employer match is an easy way to essentially receive free money.
DIVERSIFY YOUR PORTFOLIO
No matter where you are in your investment your journey, it’s never too early to get serious about diversifying your portfolio. Investing in a mix of different asset classes can significantly lower your overall risk while potentially boosting expected returns.
MAKE TAX-EFFICIENT INVESTMENTS
Income taxes on your earnings can have a big impact on your portfolio’s performance. Luckily, there are a number of ways to minimize tax obligations, such as selecting investments with built-in tax efficiencies and holding them in a tax-advantaged investment account.
Want to know more about how you should be investing according to your unique financial situation? Our team of wealth advisors are here to help you maximize your investment potential. Connect with us today to learn more.Â
