Retirement Planning For 30-Somethings: Managing Your Investments
The investment strategies that you use in your 30s will likely be different from those employed during your 20s. Many 30-somethings are looking for more sophisticated investment options and strategies. While you should be working with an experienced and competent investment professional, it helps to understand some basis concepts and the various approaches that can be taken with your investments. The following are some that you can consider:
The type of investment and/or the type of savings vehicle will determine how your returns on investments are taxed. Interest on amounts held in regular savings or brokerage account are usually taxed the year accrued. For example, if you earn interest of $1,000 on your saving for this year, the entire amount would be included in your income for this year and therefore subject to income tax. Growth on investments in assets such as stocks, bonds and mutual funds are taxed when the asset is liquidated. The rate at which the growth is taxed depends on how long the assets was held before it was sold; assets held for less than one year are taxed at the short-term capitals gains rate, and those held for more than one year are taxed at the long-term capital gains rate.
Earnings and growth on investments held in an IRA, qualified plan or 403(b) account are tax-deferred, which means they are not taxed until withdrawn from the account. This allows for a compound growth effect, as the amount that remains to be reinvested is not reduced by income tax paid. If the account is a Roth IRA or designated Roth Account (DRA), the earnings would be tax-free distributions are qualified[E1] .
In you invest in assets that provide tax-free returns, such as municipal bonds, do not hold these investments in tax-deferred retirement accounts as doing do could cause such income to become taxable when withdrawn from the retirement account.
Revise Your Portfolio
Generally, an aggressive asset allocation model is recommended for someone in their 30s. However, your asset allocation model depends on factors which includes your risk tolerance, and must be customized.
Historically speaking, stocks provide a higher return on investments than other investments and usually represent the majority portion of an aggressive portfolio. The various types of stocks in which you can invest include the following:
- Blue chip stocks: These are stocks of recognizable companies with a long history of positive market performance. Examples include Microsoft, McDonalds and Wal-Mart.
- Income stocks: These are stocks that usually pay out high dividends, and are usually recommend for individuals who have current need for income from their savings. Income stocks are usually not recommended for someone in their 20s[E2] .
- Growth Stocks: These are stocks of companies that are expected to increase in market value and, unlike income stocks which usually pay dividends, growth stocks usually reinvest dividends, which helps to increase the value of the stock.
- Value stocks: These are usually considered to be undervalued, and therefore available at bargain prices. The expectation is that they would produce significant return on investments when their market price is "corrected."
- International stocks: These are stocks of companies in foreign countries.
An aggressive allocation model usually includes a smaller percentage of bonds and mutual funds. Typically, investments in a bond guarantee a return on investment, with interest being paid at agreed pre-determined time frames and the principal amount being returned when the bond matures. The following are some of the types of bonds in which you can invest:
These are issued by state and local governments, and produce tax-free income. Because of the tax-free nature of these bonds, they are usually not considered a suitable investment for tax-deferred accounts, as distributions from these accounts are treated as ordinary taxable income. As such, investing your tax-deferred amount in a municipal bond could result in you paying income tax on amounts that could have been tax-free.
These are backed by the credit of the United States and issued for 30-year terms. They pay interest every six months until maturity, at which point you would receive a payment for the face value. The interest is exempt from state and local income taxes.
These issued for terms of2, 3, 5, 7 and 10 years, and pay interest every six months until maturity, at which point you would receive a payment for the face value. The interest is exempt from state and local income taxes.
Zero Coupon Bonds
These do not pay interest, but are sold at a discount rate. Bonds are considered a safer investment than stocks, but stocks usually provide for higher returns over the long term. It may make better financial sense to invest non-tax deferred assets in bonds that provide tax-free interest, as investing tax-deferred amounts in these bonds would result in the interest being taxable.
Mutual funds allow you to invest in multiple securities or binds by making one purchase. For instance, you may find that one fund has invested in hundreds of stocks. This may allow you to diversify your portfolio more easily. Mutual funds are usually managed by expert money managers, which means they allow you the benefit of a professional investment advisor, albeit indirectly.
When investing in a mutual fund, you have the option of choosing between growth funds which, as the name suggests, provides for growth, and income funds which provide income. There are many other investment options available, and what is included in your portfolio is usually determined by what your portfolio manager thinks is suitable. For example, while many consider annuities a good investment for those who want to preserve principal and guaranteed return on investments, they are usually more suitable for individuals who have amassed enough to make it worthwhile, and individuals who are closer to retirement age.
Your investments should reflect the appropriate balance of market risk so as to prevent exposure to significant market loss due to one or a few investments. Investments that provide the opportunity for the highest rate of return are usually the ones with the highest level of risks, such as stocks. The ones that provide the lowest rate of returns are usually the ones with the least amount of market risk.
If the amount of market risk associated with your portfolio causes you undue stress, you are considered to have a low risk tolerance, and it may be practical to redesign your portfolio to one with less risk, even if it is determine that the amount of risk is suitable for your investment profile. Nevertheless, your financial advisor may ignore a low level of risk tolerance, if it is determined that it negatively impacts the ability to provide for sufficient growth for your investments.
Your targeted retirement age is usually taken into consideration. This is usually used to determine how much time you have to regain any market losses. Because you are in your thirties, your portfolio may be able to tolerate high-risk investments that can also provide high rates of returns. If your portfolio experiences any loss, you are likely to recover those losses over time.
When designing your portfolio, your advisor will take many factors into consideration, such as:
- Whether there is sufficient diversification. This helps to hedge against market losses, by using different types of investments and asset classes.
- Whether and how often your portfolio needs to be rebalanced. What worked for you a year ago might not be practical now.
- Your other savings and how they correlate with the amounts being invested.
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