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IRA (Individual Retirement Account)
IRA (Individual Retirement Account)
1. Choose the Right IRA Type
Traditional IRA – Contributions may be tax-deductible, but withdrawals in retirement are taxed.
Roth IRA – Contributions are made with after-tax money, but withdrawals in retirement are tax-free.
2. Pick a Brokerage Firm
If you haven't already, choose a brokerage with low fees and good research tools. Some popular choices:
Charles Schwab https://www.schwab.com
Fidelity https://www.fidelity.com/
Vanguard https://investor.vanguard.com/
3. Build Your Portfolio
Stocks (growth potential, higher risk) – Consider ETFs, individual stocks, or dividend-paying stocks.
Bonds (stability, lower risk) – U.S. Treasury, corporate, or municipal bonds.
Index Funds & ETFs (diversification, lower maintenance) – S&P 500 ETFs, total market funds, or sector-specific funds.
Alternative Investments (optional) – REITs (real estate), commodities, or international funds for diversification.
4. Decide on an Investment Strategy
Growth Strategy – Focus on stocks and ETFs with high growth potential (good if you’re far from retirement).
Income Strategy – Invest in dividend stocks and bonds to generate passive income (better for those closer to retirement).
Balanced Strategy – A mix of growth and income investments to reduce risk while still growing wealth.
5. Manage Your IRA
Contribute regularly (up to the annual limit – $7,000 in 2025, or $8,000 if you're 50+).
Reinvest dividends to maximize compounding growth.
Rebalance to maintain your preferred mix of stocks and bonds.
Be mindful of taxes – Roth IRAs offer tax-free growth, while Traditional IRAs require tax planning for withdrawals.
Asset Allocation
Asset Allocation
A common rule of thumb for asset allocation, especially regarding stocks and bonds, is to subtract your age from 100 to determine the percentage of your portfolio to allocate to stocks. For example, a 30-year-old might allocate 70% to stocks, while a 60-year-old might allocate 40%. As life expectancy increases, some experts suggest subtracting your age from 110 or even 120 for a more aggressive allocation to stocks.
Here's a more detailed breakdown:
Younger Investors (20s-30s):
Rule of 100: A 30-year-old following the 100 Rule might allocate 70% to stocks and 30% bonds (100 - 30 = 70).
Rule of 110: A more aggressive approach might allocate 80% to stocks and 30% bonds (110 - 30 = 80
Rule of 120: A very aggressive approach might allocate 90% to stocks (120 - 30 = 90), notes SoFi.
Rationale: Younger investors have a longer time horizon to recover from market fluctuations and can benefit from the long-term growth potential of stocks.
Example: A 30-year-old might allocate 70-90% to stocks (S&P 500 index, international stocks), and the remaining to bonds (high-grade bonds
Middle-Aged Investors (40s-50s):
Rule of 100: A 50-year-old might allocate 50% to stocks (100 - 50 = 50). [1, 2, 4]
Rule of 110/120: A more aggressive approach might allocate 60-70% to stocks (110 - 50 = 60 or 120 - 50 = 70), notes SoFi. [4]
Rationale: As retirement nears, a balance between risk and reward becomes more important. [1, 5]
Example: A 50-year-old might allocate 50-70% to stocks and the rest to bonds and other income-generating assets like dividend-paying stocks
Older Investors (60s+):
Rule of 100: A 60-year-old might allocate 40% to stocks (100 - 60 = 40), according to Financial Samurai. [2, 7]
Rule of 110/120: A more aggressive approach might allocate 50-60% to stocks (110 - 60 = 50 or 120 - 60 = 60). [4]
Rationale: Retirees need to balance growth with income and capital preservation. [1, 7]
Example: A 60-year-old might allocate 40-60% to stocks (focus on dividend stocks, index funds), and the remaining to bonds, money market funds, and cash. [1, 7]
Important Considerations:
Risk Tolerance: Individual risk tolerance is a crucial factor. Some may prefer a higher percentage of stocks even at older ages, while others may prefer a more conservative approach.
Time Horizon: The shorter your time horizon (time until retirement), the more you should prioritize capital preservation and income generation over growth potential.
Resources
[1] https://smartasset.com/investing/asset-allocation-by-age
[2] https://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age/
[3] https://www.investopedia.com/managing-wealth/achieve-optimal-asset-allocation/
[4] https://www.sofi.com/learn/content/asset-allocation-by-age/
[6] https://www.empower.com/the-currency/money/average-portfolio-mix-by-investor-age
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