How to invest a lump sum of money at any age

It’s the age-old question when you suddenly come into a bit of money: What should you do with it?

Temptations lurk. That bucket-list trip to St. Bart’s. The Mercedes C-Class convertible you’ve always wanted. A seahorse-shaped potato chip currently going for $105,000 on eBay. Oh, that’s just me?

While the pull of instant gratification is strong, perhaps you’ve come to the more responsible decision to invest the money. Even then, it’s difficult to know where to put your new lump sum.

The answer will differ for everyone, depending on when they’ll need the money and what their risk tolerance is. But we thought a general guide may be useful for people of all ages who’ve just received a chunk of money like a bonus, an inheritance, or a tax return.

With the help of Chris Chen, a certified financial planner and the founder of Insight Financial Strategists, we’ve come up with a plan that investors can think about taking with a new windfall, no matter how old they are. While it’s impossible to personalize a plan for each individual, the assumption in this case is that the cash will be put aside for retirement.

Disclaimer: this is not specialized financial advice, and each investor should consider their own circumstances and consult a financial professional before making decisions.

Check out your suggested path below.

20-29

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• Open a brokerage account. Not a 401(k) or a Roth IRA — those should be set up with an employer and contributed to regularly.
• Setting up a separate account with a brokerage firm like Vanguard or Ally will prevent you from having to pay penalties if you need the money before retirement age.
• Once that’s done, allocate 80% of the money to stocks and 20% to bonds. The classic portfolio construction is 60% stocks and 40% bonds, but your longer investing timeline means you can withstand the volatility of the stock market. A 20% allocation to bonds will still provide some downside protection.
• Within stocks, put most of your money into an index fund like the SPDR Portfolio S&P 500 ETF (SPLG). To diversify, allocate around 5-10% to international stocks through a fund like the Schwab International Equity ETF (SCHF).

30-39

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• Perhaps you already have a stock portfolio. It’s not a bad idea to simply throw a new lump sum into existing positions, or into a broad index fund that will grow over a decadeslong period.
• It could also be a good opportunity to assess how your portfolio is structured, and think about how you can perhaps rebalance with some international exposure it so you’re properly diversified.
• You may also want to diversify into another asset class: real estate. If it’s enough money for a down payment, you could lose the lump sum to buy a home. Mortgage rates admittedly aren’t great at the moment, but you can always refinance if rates drop in the future.
• People increasingly have their first kid in their 30s. If that’s the case for you, maybe open a 529 plan for college savings. If you’re not a parent yet but plan on being one sometime down the line, you can open up a 529 plan for yourself, as the funds can be used for anyone in your family.

40-49

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• You’re starting to get closer to retirement age, but assuming a retirement age of 65, you still probably have enough time to keep your equity exposure aggressive.
• Put 80% of the money into an S&P 500 index fund and 20% into bonds through a fund like the iShares Core US Aggregate Bond ETF (AGG).
• If you’re lucky enough to feel like you’re pretty well covered on your own retirement needs, you might consider opening up a Roth IRA for your kids, if you have them.

50-59

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• Retirement is on the horizon, so you should start taking a more cautious and active approach to money management.
• At this point, it’s a good idea to hire a Certified Financial Planner to develop a plan that’s unique to your needs.
• A generally good idea heading into retirement is to start building up a three-year “safe bucket,” which is enough living expenses to cover three years.
• You’ll have this money in low-risk, shorter-term bonds. Any leftover money can go into stock-market index funds.
• Stocks are risky and volatile investments that can be subject to significant downside in a short period of time. That’s why it’s good to have an investing timeline of at least a few years, or even better, more than a decade.

60+

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• It’s the same advice for those in their 50s: start building up enough funds to cover three years of living expenses. These funds will be invested in safe-haven short-term bonds.
• Extra money can go into a stock-market index fund, though it may be a good idea to allocate part of your stock portfolio to more defensive areas of the market since your investing timeline starts to shorten.
• Once you retire, you’ll start to sell your bond positions year by year to fund your spending. As you sell the bonds, you’ll need to sell an equivalent amount in stock positions to keep your “safe bucket” three years deep.
• The calculus on how much money you’ll need to pull out of your portfolio does start to change a bit once you’re able to start claiming Social Security as early as 62.
• Happy retirement!