Your Money and Your Years

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Your age has a big influence on what sort of investment decisions you can – and should – make

Have you ever found yourself thinking that it may be too early for you to start your journey towards becoming a millionaire? Perhaps you think you earn too little because your career is just starting off and your entry level salary can only pay your bills. Perhaps you think it is too late because you are close to retirement age and don’t have any time left to invest patience along with your money – you need big returns immediately.

Well, how you handle money and investing is affected by your age and the economic conditions prevailing during your various life stages. Learning about your age bias may help you overcome it.

Let’s look at the three most significant segments of a man’s investment life cycle to determine what you need to do, given where you are, to get to where you want.

Age 20 To 40

This is the age of discovery. Life is a lesson in newness every day. It is also the time when a man is at the peak of his strength. There are three savings tips you need to consider during these years.

Forecast

If they realised their precious youth was fleeting, more young adults would contribute to a retirement account. We advise 20-somethings to call a grandparent they feel close to, or their parents, before deciding whether to start contributing to a savings plan. An experiment was conducted on young people. Those who saw their wrinkled, older selves saved about one-third more than those exposed to their current, presumably ever-youthful selves. Calling our grannies can give you a glimpse of your older self and might help a young adult decide to hold out some of his or her salary for a retirement account.

Don’t Be Afraid

What if a 30-year-old did heed advice and enrolled in a savings plan five years ago? Most financial planners would advise him or her to direct the bulk of the contribution into the stock exchange, since bonds and cash are not the answer for long-term growth. But it’s likely the sinking share market would convince this younger worker to pull out of shares and move into less risky investments. Younger people who face a downturn in the shares market go into the future scared and fearful. Subsequent upswing in the markets help to mitigate early aversion to stocks.

Dodge the Debt Ditch

Young adults like carrying credit cards. Research shows that they increase young people’s self-esteem and sense of mastery. However, another research study found that the stress of paying the bills overtook the pleasures of owning plastic for the older participants – those ages 28 through 34. Given the downbeat economy, young adults may now be less enthusiastic about credit cards. Another study found that credit card debt, acquired early, is stubbornly hard to shed.

Age 40 To 60

When middle aged people make financial decisions, they use ‘crystallised’ thinking, which is a combination of reasoning ability and past experience. A study showed that crystallised thinking peaks at about age 53, making middle-aged people better at problem solving. Use your middle age mental prowess to prepare for the vulnerable years ahead. While there’s no fool proof system for safeguarding against scams, you may want to take steps to eliminate many investing decisions, perhaps by switching to investments such as target date mutual funds. Target-date funds are geared towards investors who will reach retirement by a certain date and adjust investments toward safer vehicles such as bonds as the investors age.

Profit from Patience

Would you rather have Sh10, 000 now or Sh12, 500 in 90 days? From an investing perspective, the right answer is often to wait for the bigger gain. Younger adults usually opt for the quicker, smaller payoff. There is no specific turning point or age at which people become more patient. The process appears to happen gradually over the course of the life span. Of course, an investment can rise in value and then drop dismally. Still, an urge to quickly take a profit often means you’ll miss out on later gains while racking up trading charges.

Financial planners will advise following a systematic plan of rebalancing, meaning selling off a portion of holdings that have risen and making other investments that are out of favour and thus have temporarily depressed values.

60 Onwards Look at Loss Logically

Retirees have a much higher degree of loss aversion than the overall population since they’re relying on income from a nest egg; it is therefore understandable that retirees would seriously lament drops in the market.

Loss aversion also works against what retirees seek to attain – enough money for a steady income through their lives. Many of today’s retirees don’t have a defined pension providing steady, lifelong income. Purchasing an annuity is one answer, since these allow one to pay an upfront amount for a guaranteed income over one’s life. But retirees typically don’t like handing over a sum of money. They think of it as a loss.”

Perhaps purchasing an annuity or annuities over a space of time, rather than relinquishing a big sum all at once, would help retirees overcome the feeling they’re handing away their nest egg.

Recognise Risk as Risky

Retirees feel increased pain at financial loss. Studies show that when older people are stung by loss, they will often try to recoup their shortfall by taking risky bets for a big return. While riskier investments offer the promise of bigger rewards than safer investments that pay a minimal yield, the probability the risky bet will also be a loser is great. Simply being aware of this loss-aversion/risk-taking combination may help retirees avoid staking too much in a gamble.

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