Life Stages: Build a Foundation

Life Stages: Build a Foundation

March 14, 2023

At Alcove Private Wealth, our mission is to support you as you move through different life stages. Each stage has its own challenges and solutions. Early investors need help getting started, they are just Building a Foundation.

Let's take a deeper dive into this topic of importance: Build a Foundation.

Congratulations, you’ve finished school and you’re making your way in the professional world. Odds are, you are feeling flooded with more questions than answers.

  • How do I prioritize my goals, budget, save, invest, and build credit?
  • Why does the world seem so obsessed with my spending habits, where I live, my avocado toast, and how much I spend on coffee?

You are not a demographic. You are unique, and you require a plan tailored to you—a simple and clear roadmap to guide you to you next step.

One of the first topics we review with young professionals is Retirement Plan Basics. Many employers offer some type of retirement plan option—401k, 403b and Thrift Savings Plans being the most common. Participating in these plans can be essential to build wealth over long periods of time, but getting started can be complicated.

How Much Should I Contribute?

There is no one correct answer. However, many employers match a certain amount of your contribution. For example, if you contribute 4% of your salary, they also contribute 4%. A good rule of thumb is to contribute at least the amount that your employer is matching, if you can. Their contribution is a form of tax-deferred additional income. Be sure to learn the rules of the plan.  Most employers require that you work for them for a minimum amount of time before you are eligible for the match; and stay with them for a minimum amount of time to keep that match when you leave.

Should I Contribute as Much as I Can Afford?

Be careful here. While you should aim to save as much of your income as you can, it may not make sense to put all of your savings into a retirement plan. You are young and have more immediate goals than retirement.  A portion of your savings should be kept outside of a retirement plan to be available for your shorter term goals; perhaps a trip, a new car, a home or a wedding or whatever is important to you.

Should I Make My Contributions Before-Tax or to a Roth Option?

With a before-tax contribution you will not have to pay taxes on the income you contribute now, but taxes will be due when you withdraw the funds in the future. A Roth contribution is made after you pay taxes on your income, but no taxes will be due when you withdraw it. While it is always tempting to pay less taxes now, we would argue that a Roth contribution may make sense for a young professional. The long-term growth of tax-free money is very powerful, and that current tax deduction may be more valuable down the road as your income grows over time.

How Should I Invest My Contributions?

It is important to take all your assets into consideration when making this decision. Retirement Plan investment options are usually limited, so make sure they complement your entire investment portfolio. Since you start your retirement plan with a small monthly contribution, it may be wise to use a strategy that builds towards a specific retirement date, such as a target-date fund. That way you can get the most diversification possible with each contribution.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.