Whether you’ve just entered the workforce or you’re a seasoned employee, having a financial plan in place can help you establish savings priorities, define your investing style and create a strategy to reach your retirement goals.
Before you start investing, create a budget so you know how much money you have to spend and save every month. Next, open a savings account as a cash cushion. Then set up an emergency fund with three to six months’ of living expenses to help you through an unexpected event like an extended illness or job loss.
Once your financial basics are covered, you can research investments that match your risk tolerance. Your risk tolerance is how much risk you’re comfortable taking with your money. Advisors typically categorize investments as conservative, moderate or aggressive. Whereas aggressive investments pose the most risk, but may offer greater returns, conservative investments don’t necessarily offer high returns, but can present low risk of loss. The amount of time you have to invest and your risk tolerance can help guide your investment choices.
Just Starting Out
If available, invest in your employer-sponsored 401(k) or 403(b) retirement plan. Many plans offer matching contributions by employers. Try to contribute 10% to 15% of your salary if you can, and take advantage of employer-matching contributions (if offered) to help you reach that goal. For example, if your employer matches up to 3%, you could contribute 7% to reach a total contribution of 10% of your salary.
Individual Retirement Accounts. Traditional IRAs, Roth IRAs and Simplified Employee Pensions (SEP) IRAs are good options if you don’t have an employer-sponsored plan—or in addition to your employer plan. Some people choose to invest in a stock fund when they’re starting out because they’ll have more time to weather the stock market’s ups and downs. If you choose a stock fund, one way to help manage risk is by using dollar-cost averaging. When you regularly invest a set amount of money in stocks, you don’t have to worry about buying when prices are high or missing a chance to buy when they’re low. With dollar-cost averaging, you buy more shares when prices are low and fewer shares when prices rise.
We all know the only thing constant is change. Events like job changes, marriage, divorce, raising a family or caring for an aging relative can change your financial picture and impact your investing strategy.
You may decide you need to cut back, but don’t stop putting money aside for your retirement. Take another look at your budget. Can you make some adjustments and continue saving? Would it make sense to change the percentage of your contribution to your employer-sponsored retirement plan? Speaking to a financial advisor may help you decide.
Setbacks, such as a disability or layoff, could shorten your investment savings timeframe or start you thinking about cashing out your retirement account. Try to avoid cashing out because if you take a lump sum distribution, you’ll have to pay income taxes and could end up paying a 10% early withdrawal penalty if you’re younger than age 59½.
Consider these alternatives:
- Leave funds in your former employer-sponsored account. Note: This may not be an option if you have less than $5,000 in the account.
- Move funds into a new employer-sponsored account when you find a new job. Ask if your new employer offers a retirement savings plan and whether you can roll over the money from your previous plan.
- Do a direct rollover of funds into an IRA. You’re entitled to transfer funds from an employer-sponsored retirement plan directly into an IRA. Ask your former employer to make the check out to the institution that has your IRA, not to you, to avoid paying taxes.
Moving Up the Ladder
As you move up in job positions and salary, rev up your retirement savings. Try to save the maximum amount you can in your employer-sponsored plan or IRA. Check with the IRS for up-to-date contribution limits.
Many employer-sponsored plans will allow you to rebalance or adjust the percentages of stocks and bonds in your portfolio. Take a look at your asset allocation. How much of your portfolio is invested in stocks, bonds or mutual funds? Diversifying your portfolio among different types of investments helps manage risk.
A good rule of thumb is to save eight times your final salary by age 67. Check your portfolio to find out if you’re on track to reach your goal. If not, you might decide to postpone retirement and/or delay when you start receiving Social Security benefits.
If you’d like help getting started in investing or would like suggestions on how to maximize your portfolio, contact a financial advisor at Navy Federal Financial Group.