I am a young professional in my late 20s. I have no student loans and my vehicle is paid for. I have a 403(b) plan through work and contribute 10 percent of each paycheck to it. My employer does not match these contributions. I am saving about $1,000 a month and placing it in my savings account, which now has about $35,000. I recently moved $15,000 of that money into an online savings account for the higher APY to have as a safety net.
I am very confused by the financial world, but I want to make sure I am making the most of my money and savings. Is there anything different I should be doing with my money to better save for retirement?
First, you’re doing great. And, “the financial world” is sometimes artificially overcomplicated so that financial professionals can generate commissions.
I agree with the others. If you are not comfortable with investing, think about speaking with a fee-only, fiduciary investment advisor. They will advise in your best interests first.
In the meantime, here is what I would also recommend.
If you follow the cable tv financial news media, then consider another way to spend that time. Financial news channels can enforce viewers’ anxiety about the markets, and they rarely provide information that is in your best interest. Watching them would make you believe that every day is full of opportunities for making profits and avoiding losses, into believing that you should try and beat the markets. All that this frequent trading would do is generate fees for your broker/advisor. As far as you should be concerned, it’s building wealth in the long term that’s important (the financial climate), rather than the daily, monthly, and even yearly market swings (the financial weather). You have over 30 years left for your retirement. What the markets do tomorrow or next year is not important as long as you stick with your investment plan.
So, how should you be investing? The bad news is that beating or timing the markets is extremely difficult, not just for you, but also for the professionals. There are studies that suggest that less than 2% of the professionals may persistently be able beat the markets (and even then, this 2% may be explained by chance). This means that you should avoid advisors who tout their supposed skill; unfortunately, some advisors are cost-generating salespeople rather than fiduciaries looking out for your best interest. So, if beating the markets is extremely difficult, what does that mean? Well, that’s actually the best possible news for you and every other investor. It means that investing is actually not that complicated. If you don’t have to beat the markets, all you have to do is own the market; index funds do just that, they own hundreds or thousands of securities that mimic the market. Disciplined investors who simply own low-cost index funds (I recommend Vanguard) for the long term tend to do much better than their peers who actively engage in stock picking or market timing.
Ok, so now what? I suggest that you speak with a fee-only, fiduciary investment advisor. You said that you are maximizing your 403b. Perhaps that’s not the best way to go if you are not getting matched. It really depends on the quality and the cost of the funds in your plan (look for index funds). Then, your asset allocation (the ratio of stocks and bonds in your portfolio) depends on your risk tolerance, meaning how emotionally comfortable you are with taking risk. This is perhaps the most important piece because it will help define your investment plan (something that you can stick with throughout all the market dips and swings for the long term). Again, an investment advisor can help you with this. There are also free questionnaires online. Finally, with $15k in emergency funds, you really should consider a more “risky” investment for your 15k in savings moving forward; again, figure out your risk tolerance for this. You are relatively young and should be able to handle more risk in order to expect a higher reward. By simply investing your additional savings in a risk-appropriate, globally-diversified portfolio of low-cost index funds, your odds of exceeding 1M by the time you retire are quite good (conservatively assuming savings of 1k/month and at least 4% annual return over 35 years). Good luck.