There are two stages of investing when setting yourself up to retire at any age.

The first is called the accumulation stage. This begins the first time you invest $1 in the stock market. You might be 22 years old and starting your first job which offers you the ability to participate in a 401k. It might be when you open an online trading account to dabble in buying individual stocks. Either way, thus begins your journey into the accumulation stage.

The accumulation stage is exactly what it sounds like. It is the stage in which your focus is on accumulating assets. The younger you are and the further away from retirement you are, the more you can focus on investing for growth, even aggressive growth. Buy quality investments and be aware of any costs associated them. Low cost mutual funds are one type of investment that can provide you with good long-term returns.

As you near retirement, at whatever age you are planning for, you need to back off on the risk you may be taking. In the early years of accumulation, if the stock market falls, no worries, you have time to rebuild. As you near retirement, your time is more limited. If you are two to three years away from retiring and will be using your investment accounts for income, I suggest that this is the time to start becoming less aggressive. The worst thing could happen; you stay aggressively invested, the stock market experiences a dramatic pull back right before you retire, and your portfolio value drops significantly. This can have a very negative affect on your income that you were planning to use for your retirement.

TIP: Participate in the investment decision making process. As a retired 24-year financial advisor, I was always shocked when people would hand me a check for $100,000 and say, “Just handle it for me.” On one level I was honored by the trust the client had in me but on the other hand I was uncomfortable with the fact that the client showed no interest in being involved in the investing process. Get involved and know how much in fees you’re paying, know the risk you are taking and take ownership of your money. A little knowledge in this area can save you a lot of money in fees over your lifetime.

The second stage of investing is the distribution stage.  It does not necessarily start at retirement if you have other sources of income you can depend on. It starts when you have the need to start pulling income from your investment accounts.

The investments you are in during your accumulation stage are not the same types of investments you may want to be in when entering the distribution stage. Have a plan to generate income from your portfolio in place prior to needing the income.

Example:  You may consider moving from stocks that pay little to no dividend to a portfolio focused on dividends. It might mean moving from 100% invested in stocks to a more balanced approach where you’re now 60% in stocks and 40% in bonds.

To summarize:  when in the accumulation stage, go for growth. Two to three years prior to needing the income from your brokerage and retirement accounts, start decreasing the risk you are taking with your portfolio. When you reach the distribution stage, make sure your portfolio is income-oriented and not taking any unnecessary risk.

Live free my friends