Investing in your 40s and 50s

Investing often takes on a greater importance for people in their 40s and 50s. Not only are they getting closer to retirement, but it's a time of life when people start to think more about planning for their family's future, as well as their own.

Most people in their 40s and 50s are earning more money than they did when they were younger, which means they can contribute larger sums to their registered retirement savings plan (RRSP), tax-free savings account (TFSA) or other investment accounts. While this money won't have as much time to grow as funds invested in their 20s and 30s, investors can still build a solid nest egg based on the benefits of consistent contributions and compound growth.

What should I think about when investing in my 40s and 50s?

A good strategy for people in their 40s and 50s is to start to envision what the rest of their life might look like. For many, it will be retiring in 10, 20 or more years. For others it may be working part time or even starting a new business. Regardless of what they plan to do down the road, investors need to figure out their desired lifestyle and ensure they're setting aside enough money to fund those future goals. Below are some investing considerations for people in their 40s and 50s:

Should I reduce my risk exposure as I get older?

The answer is maybe. Many investors are encouraged to reduce their exposure to stocks as they get older to avoid risking money they could need in the short or medium term. While this is still the case, this encouragement may need to be revised for some investors, particularly in a low interest rate environment. Rising life expectancies are inspiring some investors to keep or even increase their exposure to equities, even as they get closer to the traditional retirement age.

The right investment mix always depends on an investor's individual risk tolerance, so do a gut check: How will you sleep at night if the markets experience a major correction in the near term? Will it impact your quality of life in the short-to-medium term?

When should I rebalance my portfolio?

Regardless of your level of risk, it's a good idea to rebalance your portfolio at least once a year to ensure that you're sticking to your target. This applies whether that target is 60% equities and 40% bonds and other less risky investments, or 85% equities and 15% bonds. Portfolio rebalancing helps you to maintain your target asset allocation and reduces your exposure to risk outside of your comfort zone.

Can I catch up on my investments?

You may be able to make up for some lost time in your 40s and 50s if your income is higher. There's an old rule of thumb that for every decade you age before you start saving, the percentage of your income you should put toward retirement increases by another 10%. So, if you start investing in your 40s, for example, you should save at least 30% versus 10% in your 20s and 20% in your 30s.

To maximize your savings and reap the tax advantages, it’s also a good idea to make use of any available unused RRSP and TFSA contribution room you have. Now's the time to catch up to ensure you meet your retirement goals.