People between 45 and 55 are in what’s conventionally called their peak earnings years. Here are some key points and financial planning strategies for people in this age group:
Understand portfolio allocation
Now that you’ll likely be saving more and contributing increasing amounts to your investment portfolio, it’s time to think carefully about asset allocation.
Focus on growth
Your peak earnings years are a time to make strides towards savings goals and make up for any lost time. For this reason, your focus should be squarely on growth. Mind you, that doesn’t mean a hyper-aggressive, speculative portfolio: conservatively managed equity-focused mutual funds and ETFs, or blue-chip dividend-producing stocks fit the bill just fine.
Gradually shift to income
As you move through your peak earnings years and approach retirement, you may need to shift focus to a blend of growth and income-oriented investments: government bonds, REITs, high-yielding dividend stocks, and perhaps rental real estate. This, however, isn’t a hard-and-fast rule. Those with secure defined benefit pension plans, for example, can probably afford to keep their portfolios focused on growth for a longer period.
Be cautious with “safe” investments
After the stock market downturn of 2008, many investors have been tempted to stick with GICs, Treasury Bills, and other guaranteed-return investments. However, these investments come with a significant risk: that their return will fail to keep up with the inflation rate. An overemphasis on safe investments may represent a significant opportunity cost for your peak earnings portfolio, and severely curtail your ability to build a portfolio large enough to fund a lengthy retirement. And, since you’ll be living longer than the generation before you, that’s important to keep in mind.