The right time to reassess investment decisions is when you are approaching or about to experience a large change in your standard of life, such as retirement. In general, your investment strategy should start with reasonable risk tolerance, and shift towards being more conservative at each subsequent life transition until you reach retirement.
Graduation from university
If you have not previously saved money, this will be the first time you will be making serious investment decisions. It is wise to budget at least 10 percent of your income towards your savings, with half of those savings going towards money you can access quickly in an emergency. Ideally, your goal should be to have six month’s income in accessible savings as your emergency fund.
This priority should remain constant even if you have student loans to repay. In this case, cut back your expenses as much as possible until your student loan is repaid. Your largest expense is probably housing. Consider living with your parents or having a roommate until you have a solid job offer and your student loan is repaid.
First career job
Reassess your investment decisions shortly after you have passed any trial period and have been accepted into the company as a career employee. You should not count on job security before this point.
Your first career job may come with a moderate or large pay increase over the jobs you held through high school and university. Your standard of life will probably increase soon afterwards, but beware of the temptation to spend as much or more than you make. Try to increase the percent of earnings you place into your savings.
This is the point in your life when your risk tolerance should be highest. After your next life transition, every investment reassessment should shift your priorities into a more conservative mix of investments.
Unemployment or disability
Both unemployment and disability can completely disrupt your previous savings plans. As soon as you can, you should make a detailed assessment of your current financial status.
Examine how much you could earn from your current savings alone if you converted them immediately to a retirement footing. If you are able to budget to stay within those earnings alone, any other benefits you receive will improve your standard of living over the long term.
House and children
Committing to your first owned home is a very special time in your life, but it can also be the source of financial distress. With wise planning, the mortgage payment will be comparable to your previous rental payment. It should not exceed more than 1/3 of your total income, which still leaves you enough space to set aside 10 percent of your income for savings.
The birth of your first child will also change your savings priorities. You will now have to consider many large upcoming expenses, such as daycare and education. It is not too early to begin saving for your child’s university tuition.
Middle age into retirement
Your 40th birthday should also be a sign that it is time to reassess your previous investment decisions to prioritize future pension income. You may also find that you are reassessing your job priorities at the same time, which will affect your investment priorities.
After your 40th birthday, plan to revisit your investment decisions every five years until you retire. In most cases, this is frequent enough to adjust investment priorities while still investing for the long term.
By the time you reach retirement age, nearly all of your investments should be in money market funds, fixed annuities, and bonds. These do not provide as high a rate of return as some of your earlier investments, but they provide a much more reliable regular income.