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Manage your investment risk and work towards a solid financial foundation for the future by following our 7-step plan to pursue financial independence.
Step 1: Review Your 401(k) Match
Before considering an Individual retirement account (IRA) or other retirement plan, look to your employer first! If your company offers a 401(k) plan, consider taking advantage of any employer-contributed matching funds. If appropriate, invest at least as much of your paycheck in the plan as your company will match. “It's a lost opportunity if you don't get the most of your employer's match,” says Ric Sarro, CFP(r) and Senior Program Manager, BECU Investment Services*. Some employers match employee 401(k) contributions at rates of 50-100%**.
Step 2 - Build A Savings Cushion
Sarro believes you should have “a minimum of three to six months of living expenses saved” in a liquid account before deciding to invest. This emergency savings fund gives you easy access to cash to cover unexpected expenses, such as car repairs, medical bills or job loss, without impacting your daily budget or upsetting your long-term investment plans.
Step 3 - Insure Against the Unexpected
It's also a good idea to purchase adequate insurance before putting money into higher-risk investments. Home, life, auto and medical insurance help defray large, unexpected expenses that can easily derail healthy budgets.
Step 4 – Consider Your 401(k) Options
After meeting your 401(k) match, invest any additional dollars from your paycheck into your company 401(k) plan. Annual contribution limits are typically much higher than with IRAs. Company 401(k) plans are tax deferred, which means you won't owe taxes on your contributions until you withdraw funds upon retirement. By contributing pre-taxed wages before they make it into your paycheck, you also enjoy the benefits of potentially lowering income taxes at the end of the year.
Step 5 – Look at Your IRA Options
Once you've funded your 401(k) plan and established your emergency fund, it's time to look at further planning your retirement. A great place to start would be to look at a Roth IRA or a Traditional IRA—especially if your do not have access to a 401(k) plan through your employer.
A Roth Individual Retirement Account (IRA) is one option, if you qualify. Unlike Traditional IRAs and other retirement plans, Roth IRAs are not tax exempt. You must pay income taxes on earned wages before contributing to a Roth IRA. However, you are able to withdraw Roth funds without paying taxes or penalties when you retire.
A Traditional IRA is also a good option to consider. Distributions are not tax-free, but Traditional IRAs offer tax-deferred growth and the possibility of deducting contributions, lowering your income taxes.
Read more about the difference between 401(k)s and IRAs and their eligibility requirements.
Step 6 - Invest For The Long Term
After you've built up emergency savings and funded your retirement, if appropriate, invest additional funds in investments such as stocks, bonds, mutual funds or exchange-traded funds (ETFs). Avoid the temptation to buy and sell stocks frequently (a practice known as daytrading) since each trade will cost you money in broker fees. Stocks have also been shown to provide better returns over long periods of time.***
Step 7 - Don't Put All Of Your Eggs In One Basket
It's important to spread funds across a variety of investments to address the risk of financial loss from any one stock or bond. This is known as “risk diversification.” Remember that different types of investments do well under different economic conditions. The trick is understanding your own personal risk tolerance, and building a portfolio with the goal to get you the highest returns within that risk level.
Ready to Invest? We Can Help!
If financial security is your goal, the Financial Advisors* from BECU Investment Services can help you create your personal roadmap towards financial independence. Click here to set up a complimentary consultation or call 206.439.5720.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Stock and mutual fund investing involves risk including loss of principal.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
*Financial Advisors are registered with, and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Insurance Products offered through LPL Financial or its licensed affiliates. BECU and BECU Investment Services is not a registered broker/dealer and is not affiliated with LPL Financial. Investments are:
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BECU Investment Services Corporate Office located at BECU, 12770 Gateway Dr., Tukwila, WA 98168. BECU, BECU Investment Services and LPL Financial are separate entities.
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**Ebeling, Ashlea. “The New Employer 401(k) Match: How Generous Is Your Boss?” Forbes, 5 February 2018.
***Siegel, Jeremy J. Stocks for the Long Run 5/e: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. McGraw-Hill, 2014.