As life ebbs and flows, so should your financial plan. A strong investing strategy requires check-ins and adjustments as your goals, risk tolerance and time horizon change.
While there are rules of thumb to help you make changes to your investments, like saving up to 20% of your income, financial advisors say to consider your specific expenses, income and goals at each stage of life so you can determine the asset allocation that makes sense for you.
Define your goals
The first step to establishing, and updating, a strong investing plan through the years is to define your goals.
For most investors, the long-term goal is a comfortable retirement. But, depending on your age, other long-term goals might include covering a child’s college tuition or paying the down payment on your dream home. As you move through life, those long-term goals become mid-term goals and, eventually, short-term goals. They’ll be accompanied with other objectives that could creep up even faster, like buying a car, paying for a wedding, renovating your home or going on vacation.
Once defined, it’s important to check in on those goals and adjust your asset allocation based on how soon you want to achieve them. This will help you save for life’s big milestones while covering your basic essentials.
Determine your risk tolerance
The timing of your goals dictates how much risk you should take as you work to achieve them, said Kelly Regan, vice president and wealth advisor at Girard, a Univest Wealth Division.
“If it’s less than two years, you probably want to be conservative with the money you have pegged for that goal,” Regan said. “Other than that, you can be a little more aggressive.”
Because of the risk that you undergo when investing your money in the financial markets — such as a market downturn happening right when you need to sell your assets and access your money —it’s typically best to keep money for your emergency fund and short-term goals in a liquid vehicle like a high-yield savings account. But once you start to look several years out, from buying a home in five to 10 years to retiring in three decades, you can allocate money for those goals to riskier assets like stocks.
Set a budget
At a high level, there are three key steps to setting a budget:
1. Calculate expenses
When determining your budget and how much you can invest, Regan said to start by looking at your fixed expenses versus your variable ones. Fixed expenses include the essentials that you pay regularly and that don’t change much, like student loan payments, your rent or mortgage, grocery bills and utilities. Variable expenses are those that can change month-to-month, like eating out or taking a vacation.
2. Identify income
Then, identify your income. How much money is coming in via your paychecks each month? Now look at the difference between that income and the expenses, and you can then see how much money you have left to save and invest. Depending on your goals, you may want to put some money in a savings account for near-term goals, like buying a new bicycle or going on a trip with friends, and invest the rest for long-term goals.
3. Check in regularly
Your budget will change throughout life: When you’re in your 20s, you may only have to pay for your own expenses, whereas in your 40s you may contribute to the expenses of your entire family. Your income will (ideally) grow as well, so it’s essential to check in regularly and make sure the amount you’re saving and investing still aligns with your goals, expenses and income.
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Investment strategy by age
When thinking about investing by age, financial advisors say to invest in more risky assets like stocks when you’re young and gradually shift your portfolio over time to include less risky assets like bonds as you near retirement.
Investing in your 20s
When you’re just out of school and starting your first job, it’s best to start investing as soon as you can to let compound interest work its magic, said Mike Landsberg, financial advisor and principal at Homrich Berg, a registered investment advisor firm.
“You have time on your side,” Landsberg said. Take advantage of any company match to a retirement savings plan like a 401(k), and make sure you have a rough budget to help you determine how much more money you can store for the future, he added.
As long as you have an emergency fund of at least three to six months’ worth of expenses, in case of unexpected financial setbacks (like job loss or a surprise medical bill), and money ear-marked for your short-term needs, you can consider investing for the long term in a portfolio of 100% stocks at this age, Regan said. You can take on more risk when you’re younger, so more small-cap stocks, mid-cap stocks and foreign stocks —which carry a bit higher risk than large-cap US stocks —can fit into your portfolio, she added.
And, as data from Vanguard show, taking on more risk with a greater allocation to stocks resulted in higher average annual returns between 1926 and 2022:
| Portfolio allocation | Average annual return | Best annual return | Worst annual return |
|---|---|---|---|
0% stocks/100% bonds | 5.1% | 32.6% | -13.1% |
10% stocks/90% bonds | 5.8% | 31.2% | -13.7% |
20% stocks/80% bonds | 6.4% | 29.8% | -14.4% |
30% stocks/70% bonds | 7.0% | 28.4% | -15.0% |
40% stocks/60% bonds | 7.6% | 27.9% | -18.4% |
50% stocks/50% bonds | 8.1% | 32.3% | -22.5% |
60% stocks/40% bonds | 8.6% | 36.7% | -26.6% |
70% stocks/30% bonds | 9.1% | 41.1% | -30.7% |
80% stocks/20% bonds | 9.5% | 45.4% | -34.9% |
90% stocks/10% bonds | 9.9% | 49.8% | -39.0% |
100% stocks/0% bonds | 10.2% | 54.2% | -43.1% |
Source: Vanguard
Investing in your 30s
As you shift into your 30s, you’re likely making more money than you were in the decade prior, and your priorities may have shifted. You may need more buckets of investable assets since you’re saving for things like a downpayment on a home or an engagement ring in the near term, Landsberg said.
Money for those short-term goals may be better off in bonds, US Treasuries and cash vehicles (especially given how high interest rates are now and how much you can earn on your cash).
But because you’re decades from retirement, “Equities are still going to rule the roost,” Landsberg said.
The asset allocation model for long-term savings like investing for retirement is still 90% to 100% in equities (stocks) and 0% to 10% in fixed income when you’re in your 30s, according to T. Rowe Price:
| Age | Equities | Fixed income | Short-term cash |
|---|---|---|---|
20s | 90%-100% | 0%-10% | 0% |
30s | 90%-100% | 0%-10% | 0% |
40s | 80%-100% | 0%-20% | 0% |
50s | 65%-85% | 15%-35% | 0% |
60s | 45%-65% | 30%-50% | 0%-10% |
70s & older | 30%-50% | 40%-60% | 0%-20% |
Source: T. Rowe Price
Note that these ranges are based on age alone, assuming an investor retires at age 65 and must make their money last for 30 years.
Investing in your 40s
In your 40s, there’s more demand on your time and your money, especially if you have children. Ideally, you are maxing out your employer-sponsored retirement savings plan if you have one as well as any individual retirement accounts (IRAs).
| Retirement account | 2024 contribution limit |
|---|---|
401(k), 403(b) & 457(b) plans | $23,000 ($30,500 for savers 50 & older) |
Traditional & Roth IRAs | $7,000 ($8,000 for savers 50 & older) |
SIMPLE IRA | $16,000 ($19,500 for savers 50 & older) |
SEP IRA | Lesser of $69,000 or 25% of employee’s total compensation |
But because retirement is getting closer, you’ll likely want to shift your portfolio so it’s a bit more conservative than it has been during the previous two decades. That may look like a portfolio of around 60% to 70% in stocks and the rest in bonds, Regan added.
Investing in your 50s
There’s an “inflection point” in your investment lifecycle as you enter your 50s, Landsberg said. You may be in your peak earning years, and —if you’ve saved for a child’s college tuition via a 529 savings plan throughout your earlier years —you may not have to cover the same expenses for your children as you did in your 40s.
Retirement is still likely at least a decade away, so you want to keep investing aggressively in much of your portfolio. But you may shift a bit more towards bonds. T. Rowe Price’s retirement asset allocation model for this age includes a 65% to 85% weighting in equities and 15% to 35% in fixed income.
This generally aligns with the findings in Vanguard’s How America Saves 2023 report, which includes data on equity allocations by age for participants in its defined contribution plans:
| Age group | Average equity allocation in 2022 |
|---|---|
Under 25 | 89% |
25-29 | 89% |
30-34 | 88% |
35-39 | 87% |
40-44 | 83% |
45-49 | 77% |
50-54 | 71% |
55-59 | 65% |
60-64 | 57% |
65-69 | 49% |
70 and over | 42% |
Source: Vanguard
Investing in your 60s
In your 60s, retirement is finally (hopefully) in sight. You’ll probably want to tilt your portfolio towards income-generating investments, like bonds and dividend-paying stocks as you continue to take risk off the table, Landsberg said. But you still want exposure to stocks.
“If the last few years have taught us anything, it’s that not even a 100% bond allocation can keep you safe,” Landsberg said, referring to the bond market’s poor performance in the face of high interest rates.
“You want to have diversification across everything,” he added, which might mean keeping 50% in stocks and the rest in fixed income.
Investing in retirement
Most people maintain conservative portfolios once they’re in retirement since they’re living off of the money they’ve invested throughout their lives, and they don’t have a long time horizon that can protect them against volatility in the market anymore. However, your retirement allocation will depend on your goals: Someone with a strong investing plan and no chance of running out of money may want to ratchet up the aggressiveness of their portfolio so they grow their funds and have more money to leave for their children, Landsberg said.
But, generally, asset allocations in retirement include 30% to 50% in equities and 40% to 60% in fixed income, according to T. Rowe Price’s model, plus up to 20% in short-term investments. The types of investments within those asset classes may change too. For example, Regan said a retiree may want to sell some of their growth stocks —those that are expected to grow in value at a higher rate than the average market —and own more dividend-paying stocks.
Frequently asked questions (FAQs)
The sooner you start investing, the longer your money has to grow. While you want to at least start investing when and if your employer offers you a retirement savings account with a company match, it’s even better to start investing sooner — that could mean contributing money from a summer job to a Roth individual retirement account (IRA) as a teenager.
As long as you have an emergency fund that can cover three to six months’ worth of expenses and enough money to cover your needs and short-term goals, you can likely invest a significant portion of your income, depending on your specific situation.
