Later-in-life investing: What you should know
When you save for retirement, the hope is to build enough wealth that you can live comfortably after you retire. As you grow older, you might find that your expected social security income might not be enough for you to retire. So, what happens if you don't start investing until you're close to retirement age?
If you find you've started your investment journey around the time your age is reaching the speed limit, it’s important to keep in mind two fundamental factors that help investors manage risk and find opportunities: Time horizon and risk tolerance.
Understanding these two concepts can help you beef up your personal finances so you don't have to work longer before you retire.
What is a time horizon?
A time horizon, or investment time horizon, is the time you expect to hold an investment before selling it. Longer time horizons can offer a great value for investments. Because of this, Wall Street touts the virtues of being a long-term investor—and for good reason.
The masters of the financial universe have long known that the best way to mitigate risk is to have a long enough investment time horizon to allow an investment that may have declined in value to recover in price before having to sell. Let's consider an asset that has the attributes of a quality company or investment. It's possible that the value of that investment might dip. But, with a longer the time horizon, the more likely an asset will recover from a decline in price.
If you choose to wait to invest until later in your life (closer to retirement), this reduces the duration of your time horizon. Because of this, it's helpful assess your risk tolerance before investing.
What is risk tolerance?
Risk tolerance is exactly what it sounds like: it's the amount of risk an investor can comfortably endure. Understanding your risk tolerance can help when deciding which investments you choose to make. A professional financial advisor or certified financial planner can help you establish your risk tolerance and find investments that work within your boundaries.
Risk tolerance and time horizon can work well together when choosing your investment portfolio. For each investment, it's helpful to figure out which investments fit within your risk tolerance level for the expected duration of your time horizon.
What's the easiest way to start investing later in life?
The most important thing is getting started. For most people, opening a standard brokerage account is one of the easiest ways to get started. Finding a budget and consistently investing within that budget on a monthly basis can help build your portfolio more quickly.
Also keep in mind that if you have saved little for retirement and you have the extra savings or cash flow, you have options. You can always choose to max out your 401(k) plan contributions. And, whichever type of IRAs you use (Roth IRAs, Simple IRAs, etc.), you can use catch-up contributions to help build up your retirement accounts. And, if you are self-employed you may find some defined benefit plans can also be a useful tool for making up for lost time.
Remember that taking retirement savings distributions before age 59 1/2 can come with a heavy tax burden. So, leaving your money in your accounts can do more than just earn you more money—it can save you money, as well.
What are the benefits of investing later in life?
There's one big, shiny benefit to investing later in life: knowledge. Typically, we humans mature and gain experience over the years. The more experience you have, the more you can bring a mature and knowledgeable mindset with you when making decisions that affect your retirement income. And, when interacting with financial institutions, experience can be one of the most valuable tools you have.
Take Warren Buffet and Peter Lynch, for example. They're two of the best known and most successful investors of all time. They have decades of experience working the stock market, mutual funds, real estate and other investments to their benefit. They both have a wealth of helpful knowledge. And they’re both known to give the same small piece of investing advice: "Invest in what you know."
The more experience you gain, the more you can know about what you want, how the world usually works, and what types of businesses are usually successful. Also, maturity often comes with the ability to think over a decision before making it rather than excitedly jumping in.
Maturity and experience can give you an advantage in identifying trends that may be like something you have seen before in life which can be valuable when managing your time horizon and risk tolerance related to investing and may help you reach your savings goals a little sooner than you imagined.
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