Most people who plan for retirement are very interested in finding out how to invest. After all, how you save and invest in the decades before you leave your 9-to-5 impacts how you'll spend your post-work years. Also important: The asset allocation strategy you use in your 20s and 30s won't work when you're close to (or in) retirement. Here's how to invest at every age to reach your retirement goals.

Key Takeaways

  • Investing for retirement is important at any age, but the same strategy should not be used for every stage of your life.
  • Those who are younger can tolerate more risk, but they often have less income to invest.
  • Those who near retirement may have more money to invest, but less time to recover from any losses.
  • Asset allocation by age plays an important role in building a sound retirement investing strategy.

Asset Allocation

Before considering how to invest during the different stages of your life, it's helpful to understand the concept of asset allocation. When it comes to investing, there are numerous asset classes—or, to put it simply, investment "categories." The three main assets classes are:

  • Stocks (equities)
  • Bonds (fixed-income securities)
  • Cash and cash equivalents

Other assets classes include:

  • Commodities
  • Real estate
  • Futures and other derivatives

Each asset class has a different level of risk and reward—returns, as they're usually called. As such, each class behaves differently over time, depending on what's happening in the overall economy and other factors.

For example, when the economy is booming, investors are confident. They take money out of the bond market and move it into stocks, where the earnings potential is much higher.

Similarly, when the economy cools, investors are less confident. They take money out of stocks—which now seem too risky—and seek the safe haven of the bond market. Stocks and bonds, then, are negatively correlated. When one goes up, the other goes down, and vice versa.

Here's why that's important. If you put all your money into one asset class (i.e., all your eggs in one basket), and that class tanks, you have no hedge to protect your capital.

Investing in a variety of asset classes provides diversification in your portfolio. That diversification keeps you from losing all your money if one asset class goes south.

How you arrange the assets in your portfolio is called asset allocation. Depending on your age and the number of years you have until you retire, the recommended asset allocation looks very different.

Asset Allocation By Age

Here's a look at asset allocation through life's various stages. Of course, these are general recommendations that can't take into consideration your specific circumstances or risk profile. Some investors are comfortable with a more aggressive investment approach, while others value stability above all else—or have life situations that call for extra caution, such as a child with disabilities.

A trusted financial advisor can help you figure out your risk profile. Alternatively, many online brokers have risk profile "calculators" and questionnaires that can determine if your investing style is conservative or aggressive—or somewhere in between.

At any age, you should first gather at least six to 12 month's worth of living expenses in a readily accessible place, such as a savings account, money market account, or liquid CD.

Beginning Retirement Planning: Your 20s

Sample Asset Allocation:

  • Stocks—80% to 90%
  • Bonds—10% to 20%

Even though you may have recently graduated from college and are likely still paying off student loans, use this time to start investing. Whether it’s in a company 401(k) or in an IRA you set up yourself, invest what you can as a 20-something, even if you can’t contribute the 10% recommended amount.

You have the biggest advantage over everyone by investing right now: time. Because of compound interest, what you invest during this decade has the greatest possible growth. Since you have more time to absorb changes in the market, you can focus on more aggressive growth stocks and avoid slow-growing assets like bonds.

Career-Focused: Your 30s

Sample Asset Allocation:

  • Stocks—70% to 80%
  • Bonds—20% to 30%

If you put off investing in your 20s due to paying off student loans or the fits and starts of establishing your career, your 30s are when you need to start putting money away. You’re still young enough to reap the rewards of compound interest, but old enough to be investing 10% to 15% of your income.

Even if you’re now paying for a mortgage or starting a family, contributing to your retirement should be a top priority. You still have 30 to 40 active working years left, so this is when you need to maximize that contribution. Make sure to put in enough to get the company match in your 401(k) and consider maxing it out if you can. And max out your IRAs, too, while you're at it.

You can still afford some risk, but it may be time to start adding bonds to the mix to have some safety. 

Retirement-Minded: Your 40s

Sample Asset Allocation:

  • Stocks—60% to 70%
  • Bonds—30% to 40%

If you’ve procrastinated saving for retirement until your 40s—or if you were in a low-paying career and switched to something more lucrative—now is the time to buckle down and get serious. If you're already on track, use this time to do serious portfolio building. You’re at the midpoint of your career, and you're probably approaching your peak earning potential.

Even if you’re saving for your kids’ college funds or continuing to pay your mortgage, retirement savings should be at the forefront of every financial decision. You have enough time to play catch up if you’re careful, but not enough time to mess around. Meet with a financial advisor if you’re not sure about which funds to choose. You’ll need to save in aggressive assets like stocks to give your funds the best chance to beat inflation.

However, "aggressive" doesn't mean careless. Stick with investments that have a track record of producing returns and avoid deals that are "too good to be true." And continue to max out contributions to your 401(k) and IRAs.

Almost Retirement: Your 50s and 60s

Sample Asset Allocation:

  • Stocks—50% to 60%
  • Bonds—40% to 50%

Since you’re getting closer to retirement age, now is not the time to lose focus. If you spent your younger years putting money in the latest hot stocks, you need to be more conservative the closer you get to actually needing your retirement savings.

Switching some of your investments to more stable, low-earning funds like bonds and money markets can be a good choice if you don’t want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away.

Another approach is to play catch-up by socking more money away. The IRS allows people approaching retirement to put more of their income into investment accounts. Workers who are 50 and older with a 401(k) can contribute $25,000 for 2109, and $26,000 in 2020. If you have an IRA, for 2019 and 2020 the contribution limit is $7,000 (if you're age 50 or older).

Retirement: 70s and 80s

Sample Asset Allocation:

  • Stocks—30% to 50%
  • Bonds—50% to 70%

You're likely retired by now—or will be very soon—so it's time to shift your focus from growth to income. Still, that doesn't mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings.

At this stage, you'll probably collect Social Security retirement benefits, a company pension (if you have one), and in the year you turn 70½, you'll probably start taking required minimum distributions (RMDs) from your retirement accounts.

Make sure you take those RMDs on time—there's a 50% penalty on any amount that you should have withdrawn but didn't. If you have a Roth IRA, you don't have to take RMDs, so you can leave the account to grow for your heirs if you don't need the money.

Should you still be working, by the way, you won't owe RMDs on the 401(k) you have at the company where you work. And you can still contribute to a Roth IRA if you have eligible income and fit the earnings profile. At 70, though, you are no longer eligible to contribute to a traditional IRA.

The Bottom Line

A Chinese proverb says: “The best time to plant a tree was 20 years ago. The second best time is now.”

That attitude is at the heart of investing. No matter how old you are, the best time to start investing was 20 years ago, and the second-best time is now. It’s never too late to do something.

Just make sure the decisions you make are the right ones for your age—your investment approach should age with you. It's also a good idea to meet with a qualified professional who can tell you where you stand and where you need to go.