Personal Finance

The 5 stages of life and how you should invest at each stage

Our needs and wants change in life. Our tastes in music, television, food and beverages change with age and experience.

Similarly, our investment risk tolerance should change according to the different stages of life we’re in. When we’re young, getting back on our feet is relatively easier with time on our side than when we’re older. As we level up in life, a more conservative portfolio allocation must be employed to preserve whatever wealth that we have accumulated.

A simple rule of thumb you can use to allocate your portfolio is the Rule of 100. The rule determines that individuals should hold a percentage of stocks equal to 100 minus their age. So if you’re 30 years old, 70% of your portfolio can be allocated to stocks. (This rule has also since evolved into the Rule of 120 due to longer lifespans, and works the same way).

In this article, we explore five common stages of life and how one can adapt their financial portfolio accordingly using the Rule of 100.

Stage 1: Fresh graduate (20-25 years old)

After almost two decades in school learning and honing your skills, you’re now ready to strike out on your own. This is the stage where risks should be taken because the ‘greatest risk in life is to risk nothing’. It is at this stage where many startup founders usually start off (though success is never guaranteed), where failures and mistakes are commonly made, and where personal principles are built and forged.

Fresh out of school, it’s likely your earning power is as powerful as a Level 1 Magikarp. However, it is also at this stage where you can afford to set aside a majority of your monthly salary and invest in more aggressive instruments like stocks. With time on your side, investing early allows the ‘eighth wonder of the world’ (compound interest) to work most in your favour.

Hustling hard with a second source of income is also often encouraged. As at this stage, every dollar earned goes a long way. With no dependents and liabilities (maybe with the exception of your student loan), time and a more aggressive investment profile are both fuel for an explosive start of your personal finance journey.

Level 2: Adult homeowner (25-35 years old)

Statistically, close to 60% of adults in Singapore are married and close to 90% of Singaporean adults are homeowners. With a nice home comes great responsibilities (and liabilities). There will be monthly home loans to be paid, bills, utilities, and more. With so much more cutting into your monthly wages, you will likely have less (in percentage terms) dedicated to investing and wealth accumulation.

Here, it is wise to pause and reflect on your risk tolerance level and rebalance your portfolio according to your liabilities, but stocks should still make up a majority of your portfolio as you’re still relatively at an early stage in the journey to retirement.

This stage of life is similar to the second stage of a rocket launch, it’s time to decouple some of your explosive thrusters by rebalancing your portfolio to a slightly more conservative one. To ensure you don’t fall back to square one due to unforeseen events, a holistic insurance plan is important alongside an emergency fund.

📺 Video: How much should you really spend on insurance?

Stage 3: Married with kids (35-50 years old)

Dubbed the ‘sandwich generation’, most working adults today find themselves financially responsible for both their children and their elderly parents. (If you choose not to have kids, it’s one less worry!) It wasn’t always this way, but due to rapid economic growth, inflation, and the rising cost of living, salarymen (and women) have found themselves sandwiched and stretched thin to care for two different generations.

If retirement isn’t something you’re previously concerned with, it is at this stage where planning must start. A clear plan for hitting your retirement targets should serve as the direction for the rest of your financial journey. Bonds and even gold are solid investment vehicles to keep inflation at bay and to preserve your wealth during unpredictable economic climates and crises.

Stage 1 and 2 have provided an explosive start thanks to time and the wonder of compounding. Stage 3 now is where past financial progress must be used as the foundation to secure your retirement. You’re about halfway through your life and financial journey now, time is becoming more of an adversary than an ally.

Stage 4: Pre-retirement (50-65 years old)

Things are starting to get a little more challenging at this stage — because the wage growth for most people plateaus here. This also means that one’s ability to recover from financial setback is greatly reduced.

Source: CNBC

The above study is from the U.S., but I can safely assume that it is largely the same in Singapore and around the world.

At this stage, your risk profile should be switched to a more conservative one to preserve existing wealth. Stocks now form a smaller portion of your portfolio, although holding onto several high-quality stocks for capital growth would still be wise.

At this age, you don’t want to take any unnecessary risks because you’ve worked your whole adult life to reach this point. Losing it all would be near-catastrophic and hard to recover from.

Stage 5: Retirement (65+ years old)

Sleep in or wake up for a morning jog. Have two-hour breakfasts, second breakfasts… you can do whatever your heart desires, after decades of work. At this stage, most of your wealth should be in stable high-quality bonds, blue-chip stocks, and some gold if you fancy. The returns may seem unexciting but if you’ve done it right and have a seven-figure portfolio by now, it adds up to quite a bit! (A 5% annual return on a $2-million portfolio is $100K every year.)

You’ve now got to ensure the money and wealth you’ve accumulated is enough to last you into the rest of your golden years. A way to ensure you don’t run out of funds is to follow the four percent rule. It’s a rule of thumb used to determine how much a retiree should withdraw from their retirement account each year.

It’s not a fool-proof approach as it doesn’t account for hyperinflation and rising cost of living. Also, bond yields have been on the decline compared to decades ago. However, like the Rule of 100, it is a good starting point to work with.

The fifth perspective

Almost everyone of us will pass through these stages of life. Hustling hard when you’re young, investing early, and planning ahead at each step will go a long way in securing your financial independence and a golden retirement.

Remember that the Rule of 100 is a rule of thumb. Each person has different risk tolerances and may experience each stage earlier or later in life. So be sure to adjust your portfolio allocations according to what makes the most sense for you and where you currently are in life. All the best!

Russell Kua

Russell Kua is the firstborn to a stock broker who lost it all in the 1997 Asian Financial Crisis. Learning from those lessons since his preteen years, he is now debt free, a homeowner, and happily married with a son before his 30th birthday. Follow him as he writes about his journey to financial independence.

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