Investing through life's stages

Investing is a lifelong process. The sooner you start, the better off you'll be in the long run. It's best to start saving and investing as soon as you start earning money, even if it's only $10 a paycheck. The discipline and skills you learn can benefit you for the rest of your life. But no matter how old you are when you start thinking seriously about saving and investing, it's never too late to begin.

The first part of a successful lifelong investment strategy is disciplined savings habits. Regardless of whether you are saving for retirement, a new house, or just that extravagant dining room set, you will need to develop rigid savings habits. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, they are even easier.

Factors that affect your investment decisions

Once you begin saving on a regular basis, you'll soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to decide what your needs are and how comfortable you are with risk.

Growth or income

What do you need the money for? The answer to this question will help determine whether you want to put your savings into investment products with the potential to produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund generally does not need to produce income until you retire, so you might want to consider emphasizing more of a growth strategy until you are close to retirement and more of an income strategy later on.

Time and risk tolerance

All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you may tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments.

Sound strategies for everyone

Everyone lives his or her life differently, and everyone has complicated emotions about money, so investment decisions are highly personal and unique to each person. But there are some basic rules that apply to most investors.

To provide liquidity for emergencies, you may want to have a cash reserve in a money market fundFootnote ¹, traditional savings account, or certificate of deposit (CD), no matter what your life stage.
Also, if you can tolerate even a little risk, you may want to have some portion of your portfolio in stocks to help protect your savings from being devalued due to inflation.
Another good idea is scheduling annual reviews of your investments with a financial professional. This habit will keep you up to date on your investments and help spot potential problems in your investment strategy.
Finally, every investment decision should include tax considerations. Investment earnings can be taxable, tax deferred, or tax free. You should be aware of the taxable status of your investments and take that into account when setting up and reviewing an investment strategy.

Investing for life stages

Although everyone's attitude toward investing and money is different, most investors share some common situations throughout their lives. For instance, where you are in your life cycle certainly affects how you invest for retirement, but what about other life stages that aren't so closely related to age?

Let's say you're 40 and expecting your first child. You'll need to decide how to balance your finances to account for the additional expenses of a child. Perhaps you'll need to supplement your income with income-producing investments. Moreover, your child will be entering college at about the time you're ready to retire! In these circumstances, your growth and income needs most certainly will change, and maybe your risk tolerance as well.

The following are some major life events that most of us share and some investment decisions that you may want to consider:

When you get your first "real" job:

Start a savings account to build a cash reserve
Start a retirement fund and make regular monthly contributions, no matter how small

When you get a raise:

Increase your contribution to your company-sponsored retirement plan
Invest after-tax dollars in municipal bonds that offer tax-exempt interest
Increase your cash reserves

When you get married:

Determine your new investment contributions and allocations, taking into account your combined income and expenses

When you want to buy your first house:

Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing, and moving costs

When you have a baby:

Increase your cash reserves
Increase your life insurance
Start a college fund

When you change jobs:

Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package
Consider your options for your account in your company's retirement savings or pension plan. You may be able to either keep the money in your old plan, transfer it to your new employer's plan, take a cash distribution, or roll the money over to an individual retirement account (IRA).Footnote ²

When all your children have moved out of the house:

Boost your retirement savings contributions

When you reach 55:

Review your retirement fund asset allocation to accommodate the shorter time frame for your investments
Continue saving for retirement

When you retire:

Carefully study the options you may have for taking money from your company retirement plan.Footnote ² Discuss your alternatives with your financial professional.
Review your combined potential income after retirement and reallocate your investments to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years

Discipline and a financial professional can help

One of the hardest things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you can meet your investment goals. And if you're not fascinated with investing, it's probably also hard to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial professional can go a long way toward helping you practice smart money management over your entire lifetime.

Footnote ¹ An investment in money market mutual funds is not a bank deposit, and is not insured or guaranteed by Bank of America Corporation or any of its affiliates or by the Federal Deposit Insurance Corporation or any other government agency. Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds. Please see the prospectuses for a complete discussion of the risks of investing in money market mutual funds.

Footnote
You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment (particularly with reference to employer stock), and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information visit our rollover page or call Merrill at 888.637.3343.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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