Whether you’re just beginning your investing journey or have been on it for many years, chances are you’ll make a wrong turn or two along the way. The good news is that no matter your timeline or situation, there are actions you can take to get back on the path to financial independence.
We look at the investor’s journey from two perspectives – the story of Jordan and Taylor. Don’t worry, as in all fairytales, lessons are learned but it comes out well in the end.
Key concepts we’ll cover: Building a cash reserve, contributing to 401(k)s and IRAs, matching your portfolio allocation to investment horizon, changing jobs, and creating Health Savings Accounts (HSAs).
The Story of Jordan and Taylor
Jordan and Taylor are ‘resume twins.’ They graduated the same year, started the same job at the same time (adulting success!), and both had successful careers. Twenty years later, Jordan had a retirement fund worth over $1 million dollars. Taylor had a much smaller amount saved and a lot of anxiety about retirement. What happened?
The difference was that Jordan started early and planned for the future, while Taylor didn’t give the future much thought at all. Jordan’s savings provided the flexibility to make career changes and the prospect of a comfortable retirement began to come into view. Taylor began to realize there would be no retirement – just a more daily grind of work.
The Beginning: Starting Your Career
Building a Cash Reserve
Jordan knew the importance of an emergency fund and saved a minimum of three months of salary. The cash reserve was kept in a higher-yielding savings account or money market account, not a checking or debit card account. This maximized potential interest and minimized the chance that it would be invaded. As Jordan’s salary grew, the balance in the reserve fund kept pace. This came in handy when Jordan’s company was acquired, and staff were laid off. Jordan could afford to take a few months to find the right opportunity and landed a job with more responsibility and a higher salary. Taylor faced the same crisis, but with maxed-out credit cards and rent due, had to take the first job that presented itself – for less money and a step down in title.
Contributing to a Retirement Plan
Jordan’s starting contribution to the company’s 401(k) plan wasn’t much – a little over 5% – but it was enough to get over the minimum for the company match. The matching amount contributed by Jordan’s employer was basically free money. A corporate matching contribution to a 401(k) plan is just like salary (except for the not getting to spend it right now part) with one additional feature – it’s considered pre-tax income, so taxes are not due on it until the money is withdrawn in retirement.
Within a couple of years, Jordan was saving at least 15% of salary and very soon was hitting the maximum every year. The employer match doesn’t count against the maximum contribution amount, which allows for even more saving. Taylor? All that high-interest credit card debt was already starting to eat up a lot of salary, so even managing 5-10% was a struggle.
Investing for Growth
Because Jordan was starting out and the investment time horizon was long-term at this point, an aggressive growth strategy was a reasonable investment. This generally means an allocation to at least 70% stocks and 30% bonds. There will be times when the market struggles, but a long-time horizon provides time to recover from drops and profit from expansions.
Upping the Ante: Raises and Job Changes
Opening an IRA Account
With the new job and higher salary, 15% of Jordan’s total income was soon over the maximum contribution to the company 401(k) plan. Jordan was committed to saving 15%, and so opened an IRA with the difference, even though there was no pre-tax advantage. However, this increased overall retirement savings and gave Jordan access to investment options that were unavailable with the company 401(k) plan.
Taylor, growing increasingly worried about retirement, remembered that Jordan was a financial advisor and had helped more than one client get back on track, even with only ten or fifteen years to go until retirement. The good news was that Taylor had recently been offered a new job.
Taylor had the option to keep the previous retirement plan rather than roll it over into the new plan, which had a different fee structure and different investments. Opening a new retirement account at the new company and committing to making the maximum contribution – plus the catch-up contribution – soon had Taylor’s plan balance looking healthy.
Ten years later, Taylor had a much-improved financial picture and was looking forward to the last few years of a long career and the beginning of retirement. Jordan, of course, had been retired for ten years, started a new not-for-profit company and was looking forward to opening a foundation.
Where does this story leave you?
Depending on where you’re at in your journey, here’s a roundup of a few steps you can take.
A financial advisor can create a concerted plan for your financial situation. Creating a solid financial structure through saving and investing is critical to ensuring that your hard work pays off now and, in the future, and by working together with a financial advisor you can get where you want to go.
This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.