Imagine your life in 20-30 years. What do you see yourself doing? Suppose you answered relaxing on a beach, traveling worldwide, or enjoying your family and friends in a metropolitan area. In that case, these are all attainable outcomes that require planning for the future.
A pathway to your financial future should include a 401(k) plan and an individual retirement plan. Originally named after a section of the Internal Revenue Code, a 401(k) plan provides a cash or deferred arrangement..an employee can have a portion of their compensation contributed to a qualified retirement plan as a pre-tax reduction in salary or as an after-tax contribution. (EBRI, 2018)
A 401(k) plan allows employees to contribute to their retirement while potentially earning interest on future contributions. Financial planning should start with the end goal in mind. Some questions to consider, who do I want to be? Where do I want to be? What is my lifestyle? How can I afford this lifestyle?
401(k)s are employee-sponsored programs. These plans can come with matching opportunities, where a company contributes to your retirement up to a certain amount (not all companies offer this option). A company match is an excellent opportunity to maximize your contributions.
Knowing the rules of a 401(k) is critical. There are Traditional and Roth 401(k) plans. These plans determine how contributions are taxed—a Traditional Plan taxes employee contributions upon withdrawing funds at the appropriate retirement age. A Roth 401(k) plan contributions utilize after-tax dollars and withdrawal distributions are not taxed.
Each year, the Internal Revenue Service (IRS) shares contribution limits. For example, in 2023, 401(k) plans could not exceed $22,500. This limit is set for both Traditional and Roth 401(k) plans.The 2023 IRA contribution limits are $6,500 for participants under 50 and $7,500 for participants 50 and over.
An additional investment vehicle is an Individual Retirement Account (IRA). It offers an individual to contribute to retirement outside of 401(k)s. IRAs are housed within online brokerages, likeVanguard,Fidelity,Charles Schwab, andTD Ameritrade, and enable participants to invest in funds, stocks, and bonds across the stock exchange.
Try each site for usability and user experience to determine which brokerage suits you. One brokerage may work for your friend, but it may not work for you. First, call the customer service line to see the customer experience and then play around with the site. Is it easy to use? Do you understand the learning resources? Or does it confuse you? Then, choose the best brokerage that works for you. Adopting an allocation strategy is essential once you've decided on a brokerage. How will you grow your portfolio?
One of the goals for investing is to start early to ensure more time in the market. When considering your investment allocation, you want to consider your risk tolerance, your investment appetite, and the overall goal of the investment. The plans mentioned above are considered long-term investments and will not be touched later in an investor's life. Knowing this should help you decide on the allocation of your investments.
Typically you want to reduce your risk as you age. When planning to retire, you might want to be super aggressive with your assets in your 20s with fewer responsibilities and more conservative in your 50s.
In the above picture, you will find Investor 1 and Investor 2. The difference between these investors is when they started to invest. One started ten years later even though he invested for 30 years (20 years longer than Investor 1), he still has less money because of those of the ten years, he chose to wait. The goal is to start now, whether 35, 45, or 55. Once you have the tools to start, the biggest step is to take action.
There are multiple strategies to apply to your investment portfolio. The 100 minus your age rule is an age-old investment strategy. You take 100 minus your age. For example, if you are 25, the number is 75. According to the rule, 75% of your portfolio should be invested in equities and 25% in bonds. Did you calculate yours? What’s the number?
Contributing to a 401(k) plan can result in hundreds of thousands, even millions of dollars, in the future. Retirement plans offer stability in 20-30 years.
The perfect time to start investing is now. Whether starting your first job, making a career change, or entering the workforce after a hiatus, investing in your financial future is critical and can jumpstart your financial future. How do you plan to jumpstart your financial future today? Share in a comment below or send an email to thewealthplayground@gmail.com
