(Chuck Saletta)
One of the best parts of investing is that it is an activity you can engage in throughout your life. Warren Buffett, for example, is 91 years old and still active in the game. What this means for you is simple: you’re never too old to start investing.
Of course it’s a lot easier to build a large nest egg if you start young, but as long as you receive more money than is strictly necessary to cover your costs, you have the opportunity to invest. Older people face slightly different rules when it comes to where and how they can invest than younger people, but the act of investing is open to anyone who can put up the cash.
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Deadlines to keep in mind
No matter what your age, it’s important to keep the time horizon until you need the money in mind when looking to invest. This is particularly crucial for seniors who often don’t have time to wait for their money back or a high-paying job they can rely on for money to spend when the market moves against them.
A decent strategy is to divide your financial needs into three different time intervals:
- Emergencies: You don’t know when you’ll need it, but you’ll be glad to have it in cash when you need it.
- Within the next five years: Expected expenses you’ll want the money to cover within that time frame.
- Further into the future: Money that can grow to help you meet your longer-term priorities.
Emergency money must be accessible. Yes, you will lose purchasing power over time due to inflation, but that money belongs in a savings account, penalty-free certificate of deposit, or other highly secure and easily accessible source of cash. This is important because the market never offers guaranteed returns. If you need your emergency money at a time when the market is down, being forced to sell shares when they are down to cover your costs may make it more difficult for you to participate in any subsequent rally.
The money you need in the next five years does not belong in stocks. Instead, a duration equal investment grade bond ladder, Treasury bonds or other higher certainty investments would be more appropriate. Your potential returns are likely to be lower than in stocks, but you’ll have a higher chance that the money you’ll need will be available to you when you need it. After all, as the first half of 2022 reminded us, in the short term, stocks can go up or down.
Only money that you don’t expect to spend for more than five years should be considered a candidate for investing in the stock market. If you’re a retired senior, that can mean a combination of money for later in your retirement years, the money you want to leave as a charitable bequest and the money you intend to pass on to your heirs. So yes, even seniors deep in retirement can justify investing at least a portion of their assets in more aggressive tools like stocks.
What rules should older people keep in mind?
All that said, there are some rules that are different for older people than for their younger counterparts. First, if you have Medicare, even just Medicare Part A, you can no longer contribute to a health savings account (HSA). That’s because Medicare isn’t considered a high-deductible health insurance plan, and being enrolled exclusively in that type of health insurance is a prerequisite for investing new money in an HSA.
Also, once you turn 72, you must take Minimum Required Distributions from most qualified retirement plans. Those distributions must be taken from any traditional IRA you have and also from any 401(k) plan you have, unless you’re still employed by the company sponsoring that 401(k).
On a somewhat related note, to contribute new money to a 401(k) or IRA, you must be employed or working as a contractor. You need enough earned income to cover your contributions to those accounts, and you still need to pay attention to the Required Minimum Distribution rules. In other words, you may find yourself in a situation where you can’t contribute to a tax-sheltered account, or you can contribute but need to quickly withdraw some of that money.
It’s also important to note that if your income from all sources is high enough, you can increase your Medicare Part B premiums and do up to 85% of your taxable Social Security benefit.
You will never have more time to invest than you have today
Despite the age-related differences seniors face, investing can still be a great way to build wealth for yourself, your heirs, and a long-term legacy. Still, you’ll never have more time to invest than you have today, so if your income is greater than your expenses, today is a great day to put your plan into action. Get started now and improve your chances of seeing even a little bit of that legacy come to life.
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