Age has always been a factor when it comes to determining the best mix of assets with which to invest. Those who are younger can obviously tolerate substantial more risk given that they have a lengthier time horizon. There are a number of general rules and guidelines that one can follow as they age to ensure the best possible outcome when it comes time to retire.
In comparing someone who is 25 and really just starting to work to someone who is 67 there is a completely different investment objective that each must follow. In the case of the 25 year old there is a very extensive time horizon of at least 40 years until retirement. This gives the 25 year old the most significant advantage which is time and the ability for the money to grow over time. The 67 year old however isn’t interested in generating huge earnings but is instead looking to make sure that the portfolio that has been built is one that will last through retirement with a greater emphasis on investments that are stable but typically provide lower returns. The 25 year old can afford to take significant risk that the 67 year old cannot. If the older person were to experience a 10% or more decline it may be difficult to recover it in a few years whereas the 25 year old will be able to recover given the lengthier time horizon.
In terms of a stock to bond ratio the best rule of thumb is to put 100 minus your age in stocks and the rest in bonds. So for the 25 year old he should invest about 75% of his assets in stocks with an objective of growth to aggressive growth. The 67 year old would in turn invest 33% in stocks and 33% in bonds as the length to retirement is much shorter. Bonds will provide lower returns but aren’t as risky or as volatile as stocks.
Both investors should look for asset allocations that are diversified. Even within the bond market there are options for investing in everything from municipalities and the building of roads to financing debt for large corporations. Buying corporate bonds is a lower risk endeavor as in the case of bankruptcy bond or debtholders come first whereas stock equity holders can lose the entire value of their investment. Throughout ones investing career having a diversified blend of industries and things like precious metals will ensure your assets are protected.
As the 67 year old is about to retire there is likely little chance that their earning potential over the coming years is extensive. In the case of the 25 year old he or she would have many years with which to increase his or her income. If the 25 year old loses a significant amount of money then they will have the opportunity to work more, take a second job or spend less. In the case of the 67 year old there are likely costs that can’t be reduced any more such as housing and food and with the inability to produce additional income options for ensuring the retirement funds last longer are limited.
In terms of income needs the 67 year old likely knows exactly what is needed. The persons house is likely paid for and they have a set number of expenses that they must pay for each month. In the case of the 25 year old they would need to account for income needs so far in the future that it would be difficult to predict exactly what is needed. In addition, the 25 year old will likely continue to earn higher salaries as the years progress and may have expenses that will contribute to or take away from the need for investments in the future. The 25 year old again has the ability to plan and as the years go by could make adjustments to the type of investments that are needed whereas the 67 year old is at the point where the investments that are in place are going to need to last throughout retirement which could be anywhere from just a few years to nearly 30 years.
Because of the difference in the ages of these two individuals the investment time horizon, asset allocation and investment objectives are entirely different. Both are at different stages in life and must make investment decisions accordingly.