How to invest for your life stage

It's never too early to start thinking about your financial future, and taking steps to manage and improve it.

Even for younger people, who may feel they will never be able to get on the property ladder or achieve the same lifestyle as their parents or grandparents, there are steps they can take to set them on the path towards financial stability.

Perhaps the most important rule when it comes to building wealth is that savings are more important than earnings.

Spending less than you earn, and doing something meaningful with those savings, is the key.  Those who earn a high income but who spend more than they bring in are never going to build wealth.

How savings are then invested needs to be appropriate to each person's life stage and personal circumstances, but here are some basic guidelines to help everyone in their financial journey.

Investing in your early career

For those just starting out - perhaps in their first full time job - this is the time to learn how to invest.

There are many resources available to help people understand different asset classes and how they work, including the risks and volatility associated with each.

Once people start building some savings, it's a good idea to have different investment "buckets".

For example, if the goal is to save enough money for a house deposit in the next three years, then this should go in a bucket with a more conservative approach such as cash or fixed interest assets.

If the goal is five or more years, then a higher allocation to Australian and international equities is more appropriate, allowing for capital growth and higher yields.

Any superannuation should be invested in the most aggressive option, as it is such a long-term investment for this age group.

Investing in the mid-career stage

This is the stage where people can really start to set the stage for their future financial security.

The priority should be repaying non-deductible debt such as the home mortgage.

Once mortgage levels are below 50% of home value, it's time to start building an investment portfolio.

Depending on risk appetite, the portfolio can be aggressive and use gearing to invest, as people are probably reaching the peak of their earning capacity and still have some time to go to retirement, so can ride out market volatility.

Shares are usually preferable to property as it offers better diversification and there are less costs involved.

Shares are also significantly more liquid than property.

Investing later in your career

As people get closer to retirement, the aim should be to wind down the debt levels and start moving more wealth into superannuation.

Investments should be well diversified but still with a long-term focus. Taking a diversified approach to building and structuring wealth in the pre-retirement years means finding a balance between lifestyle assets (non-income producing) and investment assets.

Some risk is still warranted, as building up investment wealth that will then be used as the income base for retirement years is normally a goal for many.

Again, using the bucket approach can be useful, by having funds invested in different risk categories to help take advantage of opportunities but still manage downside risk, for the shorter-term investment requirements.

Investing in retirement

Liquidity in investments becomes even more important in retirement.

Not having liquid assets can cause enormous stress in retirement years when there is a need to draw a regular income to meet living costs.

Many retirees are trying to also preserve the capital balance of their investments, and live off the earnings.

While it can seem scary to start drawing down on capital, it's also important not to get too caught up in keeping capital intact - after all, it is designed to be used in retirement.

A common level of drawdown on wealth (particularly for superannuation pension) is 5%, so a $1 million portfolio would provide $50,000 a year for living expenses.

If also trying to protect for long-term effects of inflation, a further 2% is required, meaning the portfolio needs to generate a return of 7% a year in order to preserve retirement wealth.

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