For many, paying off debt and putting money away for retirement are the first financial goals to work toward.
In 2021, an individual is allowed to contribute $19,500 in “elective salary deferrals” to a 401(k). The employer match does not count against this contribution limit. But once you’ve maxed out your retirement accounts for the year, what comes next?
The only way to answer that question is to lay out your goals.
You’re already following the essential personal finance advice and saving up for your post-work future. You’ve also paid off or are on track to pay off student loans and other debts. Now what else do you want to achieve? Could you be saving and investing for a house or a child’s college fund? Or perhaps you’re more interested in funding a hobbyist endeavor or finding a way to take a sabbatical?
First, regardless of your goals, it’s important to add both dollar amounts and desired timelines to them. For example, say you want $40,000 set aside to comfortably take a four-month sabbatical in five years. That means you’ll need to save $8,000 a year.
Once you’ve set your financial goals beyond retirement, it’s time to analyze how investing can help you achieve them. The level of risk you take should line up with when you want to achieve the goal. The longer the timeline, the more risk you can safely take (safely being a relative word whenever we’re talking about the stock market). If you have five years to save $40,000, you probably won’t want to take on too much risk in investing those funds given the short timeline, unless you’re willing to push back your schedule if the market dips around the time you want to use the funds.
When it comes to where to invest, you should first consider tax-advantaged options like 529 Plans, traditional or Roth IRAs (which are subject to tax deduction and eligibility phase-outs based on income), a backdoor Roth IRA (a somewhat convoluted way to convert a traditional IRA to a Roth IRA if your income exceeds eligibility) or a donor-advised fund for charitable giving. These can help you achieve goals such as saving for education and giving back while also bringing tax benefits.
After exhausting any tax-advantaged investing options, then it’s usually time to invest in taxable accounts like individual stocks, index funds and exchange-traded funds. Although these don’t give your income a tax advantage and you’ll have to pay capital gains tax if you sell the investments for a profit, you have significantly more flexibility.
Alternatively, you don’t have to wait until you’re completely maxing out retirement (or other tax-advantaged accounts) before you start investing in taxable accounts. Your overall financial plan may be aided by investing for medium or longer-term goals that aren’t retirement.
The next question to ask is, do you need someone to help you achieve your financial goals? Vetting and hiring an experienced, objective third party can be beneficial in keeping you on track.
We’re all emotional about our money. A financial professional can help mitigate the risk that is a young investor tinkering with a portfolio during a tumultuous market. An expert can also help design models and plans to make fully informed decisions, like whether buying a house is the right move right now or how you could best strategize paying off student loans and building wealth. Professional insight can be especially helpful during a major life change such as a marriage, birth or adoption of a child, taking care of an ailing relative or planning a career transition.
Personally, I err towards the fee-only certified financial planner relationship, as there’s minimal regulation about who can call themselves a “financial adviser.” A certified financial planner earns the designation through courses, a test, experience and ongoing continuing education credits.
