Investing can seem complicated at the best of times - should you go with stocks or bonds? How much money are you willing to commit? What about risk? But Lara Gray, a financial advisor at Edward Jones, says that it’s much easier when people focus on adjusting their investments as they age to reach their retirement goals.
“Historically, people have just said if you’re 20 you should have 80 per cent stock, 20 per cent bonds,” explains Gray about what investment management used to look like. “The old rule of thumb was take your age and that’s how much you should have in bonds.”
However times have changed and Gray says the more modern way of reviewing portfolio management is looking at the investor as an individual and assessing their tolerance for risk, which is their ability to tolerate ups and downs in their portfolio, as well as factoring in the time horizon to their goal. Gray says advisors tend to break timelines down into life stages: the early investing years, the good investing years, the high income and savings years, early retirement, and late retirement.
Investing in your 20s: early investing years
“If somebody had a medium risk [tolerance] and they were in their 20s what I would probably do is talk to them about a portfolio that was growth-focused,” says Gray. “It would have 10-20 per cent in bond-based investments and between 80-90 percent in stock-based investments.”
Gray explains that people in their 20s may be thinking of retirement, but might not be making enough to realistically save for it, so starting off with something that takes time to grow makes sense.
“If they’re not making enough to pay their bills… they’re probably not saving very much. They might have a lump sum from an inheritance that they’re starting with, but they’re not able to add to it. If you’re a younger person and you’re earmarking the money for retirement only, you still have to be able to tolerate the risks of the stock market. Certainly having 20 per cent in bond-based investments and 80 per cent in stock-based investments when you have a 40-year time horizon isn’t outrageous.”
Investing in your 30s: the good investing years
“As your life changes, so can your risk tolerance,” says Gray. “By the time you’re in your mid-30s you want to have at least 25-35 percent in bond-based investments and the balance in stock-based investments.”
Now is the time when people start really thinking about what kind of retirement they’d like to have and when they want it to start, but they may have other demands on their finances that can take precedence.
“What do you want the nest egg to look like? And at what age do you want the nest egg to be made available to you? In your 30s, I’d say realistically 10 per cent (of your income) is a good goal to shoot for. At this point you possibly have a house, with a mortgage, and you might even have children, so if you can realistically scale back and always live on 90 percent of your take home pay I don’t think you’d do yourself any harm. Some people have a more disposable income, so they can save more. The goal is if you’re trying to maximize your retirement savings, saving 18 percent is what the government allows for, but if you’re making $30,000 a year you’re not going to realistically be able to save that and pay rent and a car payment or for a transit pass. But if you’re making $100,000 I hope you could set aside 18 percent.”
Investing in your 40s: maintaining the good investing years
“Portfolio changes should be gradual,” says Gray. “As you get older you are slowly increasing the bond-based component or the income-based component of the portfolio.”
Gray explains that even though the 40s may seem like the halfway mark it’s still considered in the good investing years category and changes in the portfolio should be gradual.
“Even within that category, you’re going from the 25 [per cent] up to the 35 per cent. It’s a much more gradual change in the portfolio. Say if you were 35, you’d want to be at the 25 per cent (in bonds) level because you still have quite a reasonable amount of time to retirement, but as you get closer to 45 you want to be closer to the 35 percent level.”
Investing in your 50s: the high income and savings years
“At medium risk, the high income and savings years, sort of the 10-15 years before retirement, that’s probably when you’re moving to 35-40 percent in bond-based investments,” says Gray, explaining that they define the 50s as high income years because this is when people have more discretionary income.
The kids have moved on and are doing their own thing, the house is close to being paid for if it’s not paid for already. The bills get smaller and the income is getting bigger. However this can also be a time of massive change in careers, so adjustments should still be gradual.
“When you make that transition into the high earnings years, I sometimes make the joke that they’re not so good because you’ve had to re-train for a different career. There are no shortage of people who find themselves in their early 50s and they’ve had to re-train or find a job in a different place, so they’re not maybe earning as much as they were, however the whole discretionary income applies in that maybe they were earning $80,000 and then they had to re-train and now they’re only earning $60,000, but if their house is paid for and their kids are gone, they don’t have the expenses that come with raising children and paying a mortgage.”
Investing in your 60s: early retirement to late retirement
“Now we’re looking at the 40-50 per cent in bonds, but also carrying cash balances, much higher percentages of portfolios in cash as you get closer to retirement, so that you’re not in a position where you’d have to sell investments at lower prices during a bear market,” says Gray.
However the age when people expect to retire has begun to shift and Gray has observed that young people expect to work longer than their parents.
“I’m finding younger people, interestingly enough, are actually quoting me at the ages of 67-70 as their target retirement ages,” she says. “And that is not my coaching, that is what younger clients are saying to me, and I’m talking people in their 20s, maybe early 30s. I don’t know if it’s the change in old-age security from 65 to 67, which affects everybody unless you’re in your late 50s right now. People talked about retiring at the age of 55. Older people who talk about “early retirement” and talk about retiring at age 60-62 more often than not have pensions through work, but people who are working, very few of them, even if they can afford to, talk about retiring before the age of 65.”