401k Investment Strategy by Age: Building a Strong Retirement Portfolio

Planning for retirement is a lifelong journey, and one of the key components is developing a sound investment strategy for your 401k. But as you progress through different stages of life, your investment needs and risk tolerance change, and it's important to adjust your approach accordingly. In this blog post, we'll explore the best 401k investment strategies by age and provide insights on how to build a strong retirement portfolio.

Steps you can take at every age to put yourself in a stronger financial position

At each stage of life, there are specific steps you can take to enhance your retirement savings. Let's explore these strategies in detail:

Establishing Your Career: Ages 22–39

During the early years of your career, it's crucial to start saving for retirement as soon as possible. The power of compound interest can significantly boost your savings over time. Consider the following:

• Start Saving Now: Contribute to your 401k as soon as you're eligible. Aim to save at least 10-15% of your income.
• Consider Saving in a Roth Account: If you're in a lower tax bracket, a Roth 401k may be a good option as it offers tax-free withdrawals in retirement.
• Focus on the Growth Potential of Stocks: In your younger years, you can afford to take on more risk. Allocate a higher percentage of your portfolio to equities to maximize growth potential.

Middle to Late Career: Ages 40–59

As you progress in your career, your financial obligations may increase, but it's essential to stay on track with your retirement savings. Consider the following strategies:

• Check Your Retirement Savings Progress: Regularly review your retirement savings and make adjustments if necessary to ensure you're on track to meet your goals.
• Consider Supplementing Savings With a Taxable Account: If you've maxed out your 401k contributions, consider investing in a taxable account to further grow your savings.
• Maintain a Healthy Exposure to Stocks: While it's important to balance risk as you approach retirement, maintaining a reasonable allocation to stocks can help your portfolio continue to grow.

Preparing for Retirement: Ages 60+

As you near retirement, it's crucial to assess your financial situation and make any necessary adjustments to ensure a comfortable retirement. Consider the following strategies:

• Assess Your Situation: Evaluate your retirement savings, projected income, and expenses to determine if you're on track to retire when you want.
• Consider Broadening Your Tax Diversification With Multiple Types of Accounts: Explore options such as Roth IRAs or taxable accounts to diversify your tax liability in retirement.
• Review Your Asset Allocation: Adjust your portfolio to reduce risk and focus more on capital preservation as you enter retirement.

Retirement Portfolio Assets: Allocation by Age

As you progress through different stages of life, it's important to consider altering your asset allocation to align with your changing time horizon, investment goals, and risk tolerance. Here are some key insights to keep in mind:

• New to asset allocation and investing?
• What You Need to Know About Asset Allocation (With Sebastien Page)
• How Correlation Can Dilute Diversification
• Stock Sectors: What Are They? How Are They Used?

How To Invest at Every Age

Investing at different stages of life requires a tailored approach. Consider the following investment strategies:

• Asset Allocation by Age
• Beginning Retirement Planning: Your 20s
• Career-Focused: Your 30s
• Retirement-Minded: Your 40s
• Almost Retirement: Your 50s and 60s
• Retirement: 70s and 80s
• The Bottom Line

The average 401(k) balance by age

It's helpful to have an understanding of the average 401(k) balance by age to gauge your own savings progress. Here are some key figures:

• Average 401(k) balance for 20s – $74,460; median – $29,753
• Average 401(k) balance for 30s – $160,517; median $69,718
• Average 401(k) balance for 40s – $344,182; median $151,274
• Average 401(k) balance for 50s – $558,740; median $247,338
• Average 401(k) balance for 60s – $555,621; median – $209,382
• Average 401(k) balance for 70s – $417,379; median – $103,219

To improve your retirement readiness, follow these five steps:

1. Save early, often and aggressively.
2. Don't rely only on Social Security.
3. Have a realistic understanding of when you want to retire.
4. Develop other sources of income.
5. Leverage all the resources at your disposal.

How to Structure Your Retirement Portfolio

Structuring your retirement portfolio is crucial to ensure it aligns with your goals and risk tolerance. Consider the following guidelines:

• Set aside one year of cash for emergencies.
• Create a short-term reserve to cover short-term expenses.
• Invest the rest of your portfolio in a diversified mix of assets.
• Adapt your strategy over time as your needs and goals change.

Is 100 Minus Your Age Outdated?

The rule of thumb that your stock allocation should equal 100 minus your age has been widely debated. Here's what you need to know:

• Reasons to Change the Rules
• Revised Guidelines
• Is There a Proper Asset Allocation by Age?
• What Is the Old Rule About the Best Portfolio Balance by Age?
• Does Changing Investment Portfolio Allocation by Age Make Sense?
• The Bottom Line

Explaining Asset Allocation by Age

Asset allocation is crucial to maintain a balanced portfolio. Here's what you need to know:

• Asset Allocation in Your 20s and 30s
• Asset Allocation in Your 40s and 50s
• Asset Allocation in Your 60s
• Retirement Asset Allocation
• Asset Allocation Examples
• Diversification
• Rebalancing

Building a strong retirement portfolio requires careful planning and adjustments as you progress through different stages of life. By following the right investment strategies and understanding your risk tolerance, you can create a solid foundation for a comfortable retirement.