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While it’s never too early (or too late) to start investing for retirement, the sooner you start, the longer your money has an opportunity to grow — an important consideration today, given that most people are living into their 80s, 90s, and beyond.
In fact, according to SoFi’s 2024 State of U.S. Retirement Savings Survey, while 59% of respondents say they plan to use their savings to fund their retirement, 39% worry that they will outlive what they’ve saved. Fortunately, building a retirement portfolio now, with the right mix of assets for you and your circumstances, can help provide the financial stability you need for the future.
This guide will explain the concepts of investing for retirement, discuss asset allocation by age, walk you through the steps of IRA investing, and more.
Key Points
- Building a retirement portfolio is important at any age, but starting early allows your money more time to grow.
- A retirement portfolio requires choosing an asset allocation based on an investor’s goals, timeline, and risk tolerance.
- Understanding core concepts like compounding returns and different asset types can help simplify the process for beginners.
- Selecting and funding a suitable retirement account, such as an IRA, is a crucial step.
- Managing investments, or utilizing a robo-advisor, can help individuals navigate the portfolio-building process.
Why Your 20s and 30s Are the Time to Start Investing
Retirement can seem like a long way off when you’re starting out in your career, but this is actually a prime time to start saving and creating a retirement portfolio.
Although funds may be tight for 20- and 30-somethings who are setting up their first homes and considering marriage and kids — while often repaying student loan debt — investing any extra money could help them lay the groundwork for a more financially secure retirement.
Harness the Power of Compounding
The earlier a person starts investing, the more time their money may have to grow. That’s because of the power of compounding returns.
With compounding returns, if the money invested earns a profit, and that profit is then reinvested, an individual earns money both on their original investment and on the gains. This can help your money grow over time, whether you’re investing online or through a traditional account. The more time you have to invest, the more time your returns potentially have to compound.
And while investing always includes the risk of loss, and over the course of a long career of saving and investing there may be investment losses, that longer time horizon may also help your money recover from any downturns.
Creating a Long-Term Financial Safety Net
By starting to save and invest in their 20s and 30s, individuals potentially have 30 to 40 years to build a nest egg for the future.
At the same time, some of the money they save could also help them in the more immediate future, by also saving an emergency fund. For example, financial professionals generally advise having an emergency fund with at least three- to six-months worth of expenses to tide you over in the event of an unforeseen situation, such as a medical emergency or job loss.
An emergency fund can cover your costs and help pay the bills until you get back on your feet financially, while the money you have in a retirement account can help you prepare for your future.
The Core Building Blocks of a Retirement Portfolio
As an investor puts together a portfolio, they need to determine which assets to invest in. There are many different types to consider; the assets below are just some of the investments an individual may want to explore for a balanced portfolio.
Stocks: The Engine for Growth
Stocks, which are individual shares in a company, generally offer one of the highest rates of return. However, investing in stocks also involves a higher degree of risk since the stock market can be volatile, and investors should be aware that they could lose money.
Over the long term, though, the return on stocks has generally been positive. For example, the S&P 500, which tracks the performance of 500 largest companies in the U.S. and is considered to be a gauge of the stock market’s performance, has historically had a return of 10% — or about 7% when adjusted for inflation.
Bonds: The Stabilizer for Your Portfolio
Bonds are generally less risky and volatile than stocks, and they tend to offer steadier, albeit lower, returns. When an investor buys a bond, they are essentially lending money to a company, or the federal or local government for a certain period of time. In return, the company or government pays them interest at regular intervals.
At the end of the bond’s term (when it matures), the investor gets their principal investment back.
Bonds are not without risk, however. When it comes to understanding bonds and how they work, it’s important to be aware that while many are backed by the full faith and credit of the government or company that issued them, the risk a bond carries depends on the type of bond it is. Treasury bonds are backed by the federal government and generally considered one of the lowest-risk investments. But they also tend to have lower returns.
Cash & Cash Equivalents: Your Buffer
Cash and cash equivalents are highly liquid assets. They are typically low-risk, low-return assets that are considered relatively stable in value.
Cash is money that’s easily accessible. Cash equivalents are short-term investments that have a specific maturity timeframe, like certificates of deposit (CDs) or money market funds. The idea behind cash equivalents is that they can be converted to cash fairly quickly, so the maturity period for them is typically three months or less.
Like cash, cash equivalents are generally less likely to fluctuate in value compared to other assets, such as stocks.
Creating Your Asset Allocation Strategy
Asset allocation is a technique an investor can use to divide the different types of assets in their portfolio based on their risk tolerance, goals, and time horizon for investing. When creating their asset allocation, an investor is generally aiming to create a portfolio that balances risk with returns, given the amount of time they have to invest.
So, a younger investor may make bolder investments, while someone close to retirement age might make more cautious investment choices.
Here’s what asset allocation by age might look like.
The Aggressive Portfolio (for Ages 20-35)
Younger investors who have more time to ride the ups and downs of the market, and those more comfortable with risk, may choose an aggressive portfolio for their investment account.
This type of portfolio is typically weighted more heavily toward stocks, which offer potentially higher returns but are also higher risk and more volatile. An aggressive portfolio might consist of 85% stocks, 10% bonds or other fixed-income assets, and 5% cash or cash equivalents, for example.
The Moderate Portfolio (for Ages 35-50)
Investors in their late 30s and up to age 50, might favor a portfolio that has a moderately risky allocation. Generally, investors in this group are likely to be looking to find a sweet spot between more stable holdings and those that are riskier but can potentially deliver some growth.
So, for instance, they might choose to have their portfolio contain 50% stocks, 45% bonds, and 5% cash or cash equivalents.
The Conservative Portfolio (for Ages 50+)
Investors closer to retirement age are typically more likely to create a portfolio that carries a lower degree of risk, while still potentially delivering some growth. A conservative portfolio might be made up of 60% bonds, 30% stocks, and 10% cash or cash equivalents.
These investors are still aiming to earn returns, but they’re proceeding carefully since their investment timeline is shorter and they don’t want to jeopardize their retirement fund.
Beyond Age: How Risk Tolerance Shapes Your Mix
An investor’s time horizon, typically dictated by their age, is not the only factor that comes into play when deciding on asset allocation. Another major factor is risk tolerance — the level of risk an investor is comfortable with and willing to take to achieve their investment goals.
Risk tolerance typically consists of an investor’s financial capacity, or how much they need to meet their financial goals; their time horizon, which is how long they have to invest until they need the money; and their personal capacity for risk — or how comfortable they are emotionally with risk. If the market drops, will the investor lose sleep worrying about their investments or act impulsively and sell assets? Or are they the type of person who can ride it out and stick to the investment plan they’ve chosen to align with their goals?
Once an individual has determined your risk tolerance, they may want to allocate their portfolio accordingly so that they’ll be comfortable with it.
How to Invest Your IRA Portfolio
If you’re investing through an individual retirement account (IRA), first decide which type of IRA you’d like to open — a traditional or Roth IRA. If you’re self-employed or own your own business, you may want to consider a SEP or SIMPLE IRA.
IRAs follow different sets of rules that govern how much you can contribute per year, the tax implications, and other considerations. Here, we’ll focus on ordinary IRAs for individuals with earned income.
With a Roth IRA, you contribute after-tax dollars and your withdrawals are tax-free in retirement. A Roth IRA may make sense for an investor who expects to be in a higher income tax bracket in retirement.
With a traditional IRA, you contribute pre-tax dollars. You may be able to deduct all or part of your contributions from your taxes in the year you make them, depending on your income and whether you (or your spouse) have a retirement plan at work. You’ll pay taxes on withdrawals from a traditional IRA in retirement, so investors who expect to be in a lower tax bracket in retirement (or prefer the current-year tax deduction) may want to explore this option.
Once you open the IRA account, you can transfer money from your bank account into your IRA to start investing. Using an IRA calculator can help you think about your long-term strategy. From there, these are the steps involved.
Step 1: Choose Your Investments (Stocks, ETFs, Bonds)
First, an investor decides what assets they’d like to invest in through their IRA. Some common investment options within an IRA include stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Stocks and bonds can be bought individually, while investing in ETFs or mutual funds can give an investor access to a mix of stocks, bonds, and other securities. ETFs can be traded all day like stocks, and mutual funds can be traded once per day.
Investors may want a mix of different types of assets within their IRA, based on their age, investing time horizon, goals, and risk tolerance, as discussed above.
Step 2: Automate Your Contributions
An investor can make recurring contributions to their IRA by automating the process. To do this, you can simply log into your IRA account online and set up automatic contributions from your bank. You can also use a calculator to understand the contribution limits for different IRA accounts. That way, your contributions will be made regularly and you don’t even have to think about it — or remember to do it.
Just be sure not to go over the annual IRA contribution limit. All retirement accounts have annual contribution limits.
Step 3: Rebalance Your Portfolio Annually
It’s generally a good idea for investors to review their IRA portfolio on a regular basis, such as yearly, to ensure that the investments in it continue to align with their goals, time horizon, and risk tolerance. Then, if needed, an investor can rebalance their portfolio to adjust the mix of assets and get back on track.
For example, because different assets can have different returns, an asset that overperforms, like a stock, might end up becoming a bigger portion of a portfolio than the investor desires. Rebalancing is a way for them to get back to their specific target allocation.
The Automated Alternative: Using a Robo-Advisor
Some individuals may not have enough time to manage their investment portfolio; others might not feel comfortable overseeing it. Automated investing (also known as robo investing) is an approach such investors may want to consider. Here’s what this type of investing entails.
What Is Robo Investing?
Robo investing doesn’t rely on a robot, rather these platforms typically rely on sophisticated computer algorithms to recommend a portfolio of assets to an individual based on their financial goals, time horizon, and tolerance for risk. In most cases, no human financial advisor is involved.
An investor who is interested in using automated investing generally signs up on a platform, and then fills out a questionnaire about their financial situation, goals, and risk profile. The platform uses that information to recommend a portfolio of investments (often ETFs and mutual funds). Once the investor selects the portfolio that suits them, the robo advisor sets up and manages the portfolio.
An individual usually has access to their portfolio — and can make changes or ask questions — 24 hours a day. That said, most robot portfolios are fixed; investors can’t swap out the investments, which are pre-set.
Who Is a Robo-Advisor Best For?
A robo advisor may be an option for those interested in investing for the long-term, such as for retirement, but who don’t have a lot of time or expertise to devote to managing their portfolio. It might also be a consideration for those who would like guidance, but don’t want to pay higher fees for a human financial advisor.
However, it’s important to note that many robo advisors use a range of pre-set portfolios rather than a portfolio customized specifically to an individual. As a result, these portfolios may not meet some investors’ needs.
The Takeaway
Building a retirement portfolio is important at any age, but the sooner an individual begins, the more time their money potentially has to grow. Putting together a portfolio means choosing an asset allocation based on the investor’s goals, timeline, and risk tolerance; selecting and funding a retirement account, such as an IRA; and then managing their investments. An individual could also opt for a robo advisor to help with the process.
Whatever choices an investor makes, getting started on their nest egg is the first step to working toward their financial goals.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA or an automated robo IRA, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
FAQ
What’s the difference between a 401(k) and an IRA portfolio?
A 401(k) is a workplace retirement plan that is offered and managed by your employer. There is generally a limited number of investment options you can choose from, and contributions are typically deducted automatically from your paycheck. An IRA is a retirement account that anyone with an earned income can open and manage themselves. An individual chooses the investments and makes contributions to their IRA account.
How much of my retirement portfolio should be in stocks?
How much of your retirement portfolio should be in stocks depends on your financial situation, your goals, the number of years you have to invest before you need the money, and your tolerance for risk. Generally speaking, younger investors might choose a more aggressive portfolio with a higher percentage of stocks, while older investors may want to be more conservative with their portfolio.
What are the best investments for a Roth IRA for young adults?
Because they typically have many years to invest for retirement, young adults may want to consider a higher proportion of investment options that offer opportunities for growth. They may also want to explore, as lower-cost investments that give them wide exposure to a range of companies, such as ETFs. Ultimately, of course, specific investments are up to each individual investor.
How often should I check my retirement portfolio?
How often an individual checks their investment portfolio is a matter of personal preference, and there is no one right answer. But generally, financial professionals suggest reviewing your portfolio at least once a year to make sure that the asset allocation is on track, and the investments in the portfolio still align with your investment goals, risk tolerance, and timeline. Some people may opt for biannual or quarterly portfolio check-ins.
What should a 22-year-old invest in for retirement?
Investment choices depend upon the specific individual and their financial situation, goals, and tolerance for risk. However, generally speaking, they might want to consider assets with a higher growth potential, like stocks, since they have a long investment timeline. The longer time horizon for investors in their early 20s can typically help them weather the ups and downs of the market.
Photo credit: iStock/AndriiYalanskyi
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