Retirement And Investment Trends

Investing for retirement is important at any age, but the strategy should change as you get older. Generally, younger people can tolerate more risk, but they often have less income to invest. On the other hand, older people may have more money to invest, but less time to recover from losses.

According to Vanguard's 2023 analysis of over 5 million plans, the average 401(k) balance is $112,572, while the median is significantly lower at $27,376. This is more reflective of how most Americans save for retirement.

Retirement savings grow with compound interest, so the earlier you start saving, the more opportunity your money has to grow. However, it's important to note that there is no one-size-fits-all approach to investing, and it's always a good idea to consult a financial advisor to determine the best investment strategy for your specific circumstances and risk tolerance.

How to invest at every age

Investing is an important part of retirement planning, and it's something that should be done at every age. The earlier you start, the better, as investing earlier gives your money more time to grow. However, the way you invest will change as you get older. Here's a guide on how to invest at every age.

Your 20s: Beginning Retirement Planning

In your 20s, you should start investing for retirement, even if it's a small amount. You can be more aggressive with your investments at this age, focusing on higher-risk, higher-reward assets such as stocks. Consider signing up for your employer's 401(k) plan, if they offer one, or opening a traditional or Roth individual retirement account (IRA).

Your 30s: Career-Focused

In your 30s, you might be more focused on career growth and increasing your income. This is a good time to increase the amount you're investing, especially if you're earning more. You can still afford to take some risks with your investments, but you may want to start adding some lower-risk assets, such as bonds, to your portfolio.

Your 40s: Retirement-Minded

By your 40s, retirement should be one of your top priorities. Your risk tolerance will start to shift, so while you can still place some funds into more aggressive investments, make sure you do your research and only invest in assets with solid track records of returns.

Your 50s and 60s: Almost Retirement

As you get closer to retirement, you'll want to take a more conservative approach to investing. Focus on lower-risk assets such as bonds and money market funds, and consider meeting with a financial advisor to ensure you're on track for retirement.

Your 70s and 80s: Retirement

By now, you're likely retired or close to it, so it's time to shift your focus from growth to income. You can focus on stocks that provide dividend income and add to your bond holdings. Remember that your investments don't stop in retirement, as you want to protect your purchasing power from inflation.

No matter your age, it's important to keep in mind that there is no one-size-fits-all approach to investing. Your investment strategy will depend on your financial goals, risk tolerance, and unique circumstances. Consult a financial advisor to help you create a plan that's right for you.

Why older people should invest in fewer stocks

While investing in stocks is important at any age, older people should invest in fewer stocks than younger people. Here are some reasons why:

Less Time to Recover from Losses

Older people have less time to recover from any potential losses associated with stock ownership. Stocks are generally considered to be riskier investments, and if an older person experiences a loss, they have a shorter time frame to make up for it. Bonds, on the other hand, are considered less risky and more stable, making them a more attractive investment for older individuals.

Income to Offset Losses

Younger people have more years of labour income ahead of them, which can be used to offset potential losses from investing in stocks. They have the ability to take on more risk because they have the time and future income to recover. As people get older, their labour income may decrease or become less stable, making it harder to absorb potential investment losses.

Long-Term Investment Horizon

Financial advisors often recommend that younger people with long investment horizons invest a large portion of their portfolios in stocks. The reasoning is that over long periods, above-average returns on stocks tend to offset below-average returns. However, this advice may not always be valid, as even with a long horizon, the potential magnitude of loss can offset the potential gains.

Retirement Goals

As people approach retirement age, their investment goals should shift from aggressive growth to stability and income generation. Older individuals should focus on stocks that provide dividend income and add to their bond holdings. Dividend-paying stocks can provide a steady source of income during retirement, while bonds offer lower risk and more stable returns.

Asset Allocation by Age

The recommended asset allocation changes as people age. Younger investors in their 20s and 30s can focus more on aggressive growth stocks, while older investors in their 50s and 60s should gradually shift their portfolios towards more conservative investments. This shift ensures that their investments are adequately adjusted for stability and provide a reliable income source during retirement.

Average 401(k) balance by age

The amount of money you should have saved for retirement depends on your age, income, lifestyle, and goals. While there is no one-size-fits-all answer, knowing the average 401(k) balance by age can give you a benchmark for your savings. Here is an overview of the average 401(k) balance by age as of 2024:

For Individuals in Their 20s

The average 401(k) balance for people in their 20s is around $31,722 to $80,275, with a median of $31,722. At this age, it is recommended to start saving for retirement, especially if your employer matches your contributions.

For Individuals in Their 30s

By their 30s, the average 401(k) balance increases significantly to $173,793, with a median of $74,581. This is a good time to focus on paying down any non-mortgage debt and maximizing your 401(k) contributions if possible.

For Individuals in Their 40s

The average 401(k) balance for individuals in their 40s is around $366,054, with a median of $159,072. If you haven't already, consider maximizing your 401(k) contributions to take advantage of compound growth over time.

For Individuals in Their 50s

By their 50s, the average 401(k) balance reaches $583,231, with a median of $255,036. This is the age when individuals become eligible for "catch-up" contributions, allowing them to contribute larger amounts to their retirement accounts.

For Individuals in Their 60s

As individuals approach retirement, the average 401(k) balance is around $566,198, with a median of $209,424. At this stage, it's important to have a clear understanding of your retirement plans and any additional income sources, such as Social Security benefits.

For Individuals in Their 70s

Once individuals reach their 70s, the average 401(k) balance starts to decline, with an average of $425,009 and a median of $104,792. This is due to individuals tapping into their retirement accounts and potentially lower contribution rates.

It's important to note that these averages may be skewed by outliers and that your personal financial situation may vary. It's always a good idea to seek personalized advice from a financial professional to ensure you're on track with your retirement savings goals.

Safe investments for seniors

Safe investments are important for seniors who want to reduce the risk in their investment portfolios. While these options may provide less income and little growth, they can help to prolong retirement funds and are a good option for those looking to pass money down to family members or pay for long-term care.

What to Look For

When determining the safest ways to invest, there are several things to consider:

• FDIC-insured accounts: These accounts are federally protected up to $250,000.
• Low-risk, low-return investing: Safe investment options may offer low risk and low returns but can generate passive income long-term.
• Diversification: Diversifying your investment portfolio with multiple safe investment options can provide more options for retirement income.
• Safe investing apps and resources: Educate yourself by downloading safe investing apps and resources or speaking with a financial advisor.

Types of Safe Investments

High-Yield Savings Accounts

High-yield savings accounts offer higher interest rates than traditional ones, helping to grow your money passively. This option is FDIC-insured, so you won't have to worry about major financial risks or monthly fees. The interest is compounded daily, which can be an incentive to save. However, with rising inflation and costs of living, the interest earned may be negligible.

Certificates of Deposit (CDs)

CDs are one of the safest investment options as they are insured up to $250,000. They offer a fixed interest rate over a fixed amount of time, providing a guaranteed return. There is usually a penalty for withdrawing funds before the fixed term is over.

Treasury Securities

Treasury securities are low-risk, fixed-income investments issued and backed by the US government. They include Treasury bills (short-term), notes (intermediate-term), bonds (long-term), and Treasury inflation-protected securities (TIPS).

Dividend-Paying Stocks

Well-established companies will usually pay dividends to shareholders, providing a more consistent income source. Dividend-paying stocks are less risky because shareholders will still receive dividends even if the stock market isn't performing well.

Money Market Accounts

Money market accounts are a type of savings account that may offer higher interest rates and incentives for larger deposits. They are FDIC-insured and a good short-term investment option for those new to investing or hesitant about risk. However, there may be monthly fees or restrictions on withdrawals.

Fixed Annuities

Fixed annuities are contracts that offer guaranteed returns for a period of time. They provide a guaranteed income stream with minimal risk, but there may be penalties for early withdrawal.

Additional Considerations

It's important to note that no investment is entirely safe, and even safe investments carry some risks. These include the potential to lose principal, loss of purchasing power due to inflation, and the risk of illiquidity. Additionally, being too safe with your investments can hurt your financial goals, as your money won't grow significantly.

It's recommended to consult a financial advisor to determine the right mix of safe and higher-risk investments for your portfolio, based on your specific circumstances and goals.

High-return, low-risk investments for retirees

Overview

It's understandable that retirees want to make the most of their money, but also want to avoid high-risk investments. Here are some options for retirees who want to achieve high returns while minimising risk.

High-yield savings accounts

High-yield savings accounts are a good option for retirees who want easy access to their money. They are considered very low-risk because they are government-insured up to a certain amount per account. While interest rates may differ between banks, these accounts offer a modest return on your money.

Money market funds

Money market funds are mutual funds that invest in short-term, low-risk assets. They are generally less volatile than other types of mutual funds and offer diversification and liquidity. However, the income received from this type of investment may fluctuate, and the money is not protected by the FDIC or NCUA.

Certificates of deposit (CDs)

CDs are considered one of the safest investment options because they offer a fixed rate of return over a fixed period. They can be purchased at banks, brokerage firms, and credit unions, and are insured up to a certain amount. While there is usually a penalty for early withdrawal, CDs offer higher interest rates and no monthly fees.

Treasury securities

Treasury securities are backed by the US government and come in three types: bills, notes, and bonds. Bills mature in one year or less, notes mature in up to 10 years, and bonds typically mature in 20 to 30 years. Treasury Inflation-Protected Securities (TIPS) are also available and adjust with inflation or deflation.

Dividend-paying stocks

Dividend-paying stocks are considered safer than high-growth stocks because they provide a regular income and the possibility of stock price appreciation. However, there is a risk that the company could stop paying dividends, which would hurt the stock price.

Fixed annuities

Fixed annuities are contracts that offer guaranteed returns for a period of time and are considered a safe investment option for retirees. They provide a guaranteed income stream with minimal risk, but there may be penalties for early withdrawal, high fees, and a lack of liquidity.

Frequently asked questions