I currently have a job that pays me 100,000 yr. Ive been here for a bout a year and will probably be here for a couple more. This type of money is rare is my business. Im trying be smart and put away as much as I can for retirement. My company contributes 3% of my salary in a 401K and i was thinking of adding to that and doing the maximum. I have a savings account of 40,000 and a Roth IRA of 16,000. Having access to my money is an important thing since sometimes in my career, I am in between jobs and need to dip into my savings. I have no debt. I currently save $1000 wk. I am looking for some advice as to where to invest my money. Stocks kind of scare me. Any advice would be most appreciated.
Thanks for your question. And great job with your finances so far!
While nobody knows the future, I encourage you to put together your best estimate of how long you may be between jobs and what your likely expense needs might be during that time. Let that number drive your decision as to how much you need in savings and where you should direct your $1,000 per week savings (more “rainy day fund” or to retirement plans).
If your current $40,000 is insufficient, then I’d first build that up to whatever number you believe is appropriate before maximizing contributions to your 401(k) or Roth IRA. If your $40,000 should cover it, then by all means go ahead with the retirement contributions.
In 2014, you can contribute up to a maximum of $17,500 of earned income to a 401(k) plan. You can also make Roth IRA contributions up to $5,500 of earned income, if your Modified Adjusted Gross Income (MAGI) is under the limits.
At income of around $100,000, you should be fine re: the MAGI limits. But if your income is higher in 2014, you’ll want to be aware that eligibility to contribute to a Roth IRA begins to phase out (for a single filer) when MAGI hits $114,000 and is fully phased-out at $129,000.
For many people, MAGI will be the same as their Adjusted Gross Income (AGI) at the bottom of page 1 of their federal tax return. However, MAGI is different in that it adds back a few items, such as student loan deductions, foreign income, foreign housing deductions, and so forth.
If you believe your tax bracket is likely to be higher in retirement than now, or you think everyone’s tax rates will be higher then, or you just want the flexibility of having some tax-free assets, then you may wish to maximize your Roth IRA contribution first. Then if you still have surplus savings, contribute to your 401(k). But in any event, if your employer is providing a 401(k) match (3%?), be sure you at least contribute whatever’s necessary to trigger that match. It’s “free money.”
Your “rainy day funds” should be invested very conservatively, typically in vehicles like money market funds, CDs, or maybe high-quality ultra short-term bonds funds. And yes, in the current environment of low interest rates, you’ll barely earn enough interest to buy a candy bar. But you don’t want to have your “rainy day funds” in an investment that tanks just when you need the money between jobs.
Of course, the investment of your 401(k) and Roth IRA are a different story. Most advisors will counsel you to consider your goals, time frame until you need the money, tolerance for swings in investment value, etc. Then they usually recommend a model allocation based on your investor profile. And that’s probably fine if you don’t plan to be actively involved in your investing or you don’t have an advisor who takes a tactical approach to portfolio management.
You mentioned that “stocks kind of scare me.” I currently share that view somewhat, not because there’s anything inherently wrong with stocks, but because they seem quite overpriced relative to a more normal, sustainable economic environment. Interest rates are abnormally low and corporate profits are abnormally high. The S&P500 hit a recent low of 666 in March 2009 and closed at 1848 on New Year’s eve...and we haven't had a (normal) healthy correction in stocks for many, many months. Those who study historical rolling 7 to 10 year periods find that, when the stock market is at current valuation levels, returns over the next 7 to 10 years tend to be extremely low (perhaps even negative after inflation is considered).
Could the stock market(s) go higher? Certainly. And it seems that there's a collective will to do so in the near term. But markets tend to follow cycles of ebb and flow. And what tends to get stretched and out of sync usually finds its way reverting back to normal ranges.
Most advisors will tell you that nobody can precisely and consistently “time the market.” And that’s absolutely correct. But it’s really an answer to the wrong question. Winning in the investment game isn’t about getting everything precisely and consistently right, it’s about avoiding catastrophic losses while capturing a reasonable amount of financial upside when appropriate.
So if what I’ve described is a philosophy that resonates with you, it may make sense for you to keep your 401(k) and Roth IRA allocations relatively conservative at this time, and buy back into stocks or stock funds when they can be had at better prices than today.
On the other hand, if this is more wading into the weeds than you really want—or you don’t have an advisor with a similar philosophy who’ll handle it for you—then using a model allocation mentioned earlier based on your profile may be best. You’d just need to be prepared to ride it through the ups and downs of whatever the financial markets give you.
My gosh, this reply has gone long, but I hope there are some ideas of value for you.
Wishing you a prosperous 2014 and all the best in your acting career!
Tommy, You have received two great answers from Larry and Jonathan. I would echo Jonathan's advice that you should meet with a financial advisor. Ask some of your friends, colleagues or an attorney or accountant who you know for some recommendations. Meet with several advisors so you feel comfortable with your choice and you'll gain some knowledge from each professional your talk with. Given your concern over having sometime between jobs in the future and your appreciation towards investing in stocks and advisor will be able to craft a strategy that works to achieve your goals.
I believe that the absolute best move for you today would be to begin to cultivate a relationship with a financial advisor that you trust. If you say "stocks scare me," then you need a guide to help you navigate the scary jungle of investing. Stocks are scary - but they still remain a primary driver of growth in most portfolios. One of the best wealthbuilding tools that you have at your disposal are the account types that you mention - and unfortunately, if you expect to make any money in them, you will have to invest in stocks or stock mutual funds.
Also - each and every question that you have today - the answers you are getting today will change and be different for you tomorrow. The Roth contribution limits, 401k limits, IRA deductibility rules, and prevailing economic conditions will all change virtually every year. Your own personal situation will change - you may go through marriage, divorce, health challenges, and windfalls. The rules governing health care and social security will change and you will likely live through them.
Each time some of these changes occur, you will have new questions, concerns, and perspectives. A financial advisor who works closely with you and understands your situation will be able to render invaluable advice over the years.
Take care and good luck! Jon Castle http://www.WealthGuards.com