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One of the best parts about investing is that it’s an activity you can take part in throughout your entire life. Warren Buffett, for instance, is 91 years old and is still actively in the game. What this means to you is simple: You’re never too old to start investing.
Of course, it’s much easier to build a large nest egg if you start young, but as long as you have more money coming in than you strictly need to cover your costs, you have the opportunity to invest. Seniors face slightly different rules when it comes to where and how they can invest than younger folks do, but the act of investing is open to anyone able to pony up the cash.
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Timelines to keep in mind
No matter what your age, it’s important to keep the time horizon until you’ll need the money in mind when you’re looking to invest. This is particularly crucial for seniors who often don’t have the time to wait to get money back or a high-paying job to rely on to provide spending cash when the market moves against them.
A decent strategy is to break apart your financial needs into three different time buckets:
Emergencies: You don’t know when you’ll need it, but you’ll be glad to have it as cash when you do.
Within the next five years: Expected expenses you’ll want money to cover within that time frame.
Farther out in the future: Money that can grow to help you cover your longer-term priorities.
Emergency money needs to be accessible. Yes, you’ll lose purchasing power over time to inflation, but that money belongs in a savings account, no-penalty CD, or other easily accessible, highly certain source of cash. This is important because the market never provides guaranteed returns. If you need your emergency money at a time when the market is down, being forced to sell stocks when they’re down to cover your costs can make it harder for you to participate in any recovery that follows.
Money you need within the next five years does not belong in stocks. Instead, a duration matched investment grade bond ladder, Treasury bonds, or other higher-certainty investments would be more appropriate. Your potential returns will likely be lower than in stocks, but you’ll have a higher likelihood 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 down as well as up.
Only money that you do not expect you’ll need 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 some combination of money for later in your retirement years, money you want to leave as a charitable legacy, and money you intend to pass on to your heirs. So yes — even seniors deep into their retirement can make a case to invest at least a portion of their assets in aggressive more aggressive tools like stocks.
What rules do seniors need to be aware of?
All that said, there are a few rules that are different for seniors than their younger counterparts. First, if you’re on Medicare — even just Medicare Part A — you can no longer contribute to a Health Savings Account (HSA). That’s because Medicare is not considered a High Deductible Health Insurance Plan, and being enrolled exclusively in such type of health insurance is a prerequisite to putting new money into a HSA.
In addition, once you reach age 72, you are required to take Required Minimum Distributions from most qualified retirement plans. Those distributions have to be taken from any Traditional IRAs you have and also from any 401(k) plans you have, unless you’re still employed by the company that sponsors that 401(k).
On a somewhat related note, to contribute new money to a 401(k) or IRA, you need to be employed or working as a contractor. You need sufficient income from work to cover your contributions to such accounts, and you still need to pay attention to those Required Minimum Distribution rules. In other words, you may find yourself in a situation where you either can’t contribute to a tax sheltered account or you can contribute but are quickly required to withdraw a portion of that money.
It’s also important to note that if your income from all sources gets high enough, it can raise your Medicare Part B premiums and make up to 85% of your Social Security benefit taxable.
You’ll never again have more time to invest than you do today
Despite those age-related differences that seniors face, investing can still be a great way to build wealth for yourself, your heirs, and a longer-term legacy. Still, you’ll never again have more time to invest than you do today, so if your income is larger than your outgo, today is a great day to get your plan in place. Get started now, and improve your chances of seeing at least a bit of that legacy come to life.
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