Category: blog

Financial Questions Millennials Ask: “What is the best way to save for the future outside of a work retirement plan?”

A young professional asks: “I am 27 years old and have finally worked myself into a well-paying job. I want to make the most of it by setting myself up for success down the road. I am currently investing into my thrift savings plan (TSP) once a month with the drill paycheck I receive for being in the National Guard and I also will be joining my company’s retirement plan. Other than these two methods of saving that I am currently contributing to, what is the best way for me to save for the future? I don’t want to put all of my money into a standard savings account which will not grow much over time. Should I consider online savings accounts with higher interest rates? I am also intrigued by dollar-cost averaging. Should I consider index funds?”

Here’s my answer:

Thank you for your question and congratulations on being so forward looking. At age 27 you have about three decades of saving and investing before retirement. Your future is in your hands in more ways than you may know. For example, by the time you retire the Social Security Trust Fund may well be exhausted and your benefits may be a lot lower than current retirees.

You should put as much as you can into your TSP and participate in your company’s retirement plans, which probably includes either a regular 401(k) or a Roth 401(k) plan. At your age I would consider contributing to a Roth plan. A Roth plan does not reduce your current taxes, but when you retire you can get your money out tax free, and meanwhile your money grows tax free.

You should try to save about 15% of your income for retirement. You should first create an emergency fund. You may be surprised to learn that four in ten people in this country can’t afford a $400 emergency without borrowing. An emergency fund equal to 6 months of your net income should be adequate. After funding your TSP and 401(k) plans you should open an investment account with a discount broker. Fund it with extra savings beyond what put in your tax-free accounts. Keep in mind that tax free accounts like IRAs, TSPs and 401(k) plans are not readily accessible without taxes or penalties.

Over the next few decades you will need money for things such as a home purchase, weddings, children, vacations, etc. That’s why taxable investment accounts are needed. Your tax deferred, tax free and taxable accounts all provide you with the assets you need to retire when you are ready. Based on your question I am assuming that you are not an experienced investor. Few people your age are. In fact, most people of any age are poor investors. I suggest you shop around for a good fee-only financial advisor who is willing to spend time teaching you the basics of investment management. He will charge you a fee, but it will be well worth it because learning by making mistakes is a lot more expensive.

Good luck and give me a call if you need more advice.

Major Brokers Don't Want Investors Under $250,000

As the major investment firms woo the millionaires and billionaires, they are working to drop the “smaller” investors.  There are several ways they do this.

It begins with account fees that make it prohibitively expensive to open small accounts.  Second, they won’t pay brokers on account that don’t meet their minimums.  For example, Merrill Lynch does not pay brokers on accounts under $250,000.  At these firms there is pressure from management to transfer accounts for the middle-market investor to call centers where they receive the kind of impersonal service you get when you call an 800 number.  This breaks the personal bonds that investors and advisors need to work well together.

The account minimums that the majors impose on their advisors may help the megabank-owned brokerages compete for high-net-worth clients.  But the requirements also means that modest investors cannot get the kind of personal guidance that they need to reach their goals.  It was a factor that caused us to form our own independent RIA firm because there’s more to client relationships than account size.

5 Ways of Maxing Out Your 401(k)

  1. Begin early.  Sign up to contribute to your company’s 401(k) the first day at work.  Even if you can’t contribute a lot at first, make a contribution and allow the power of compounding work for you over the years.  All things being equal, the length of time you allow your earnings to grow has the biggest impact on how much you’ll have at retirement.
  2. Max out your contribution.  Force yourself to save and you’ll find that it’s easier than you think to live within your means.
  3. Always max out the company match.  Many companies match employee contributions up to a certain percentage.  Be sure to take advantage of the company match up to its limit.  It supercharges your savings.
  4. Don’t take distributions or loans from your 401(k) until you are retired.  Distributions not only reduce the amount you have at retirement  but can cause painful tax penalties.
  5. Create a well diversified portfolio from the choices available to you.  This is one of the biggest problems employees have: not knowing how to invest the funds they are saving.  Now there is help available from Registered investment Advisors like Korving & Company that specialize in helping people manage their retirement plans, turning your 401(k) into a 401(OK).

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