Investing in Your Future: Navigating Your Financial Lifecycle

An emergency fund is a savings account or other highly liquid asset set aside to cover unexpected expenses or financial emergencies. These could include medical emergencies, car repairs, job loss, or other unforeseen events that require immediate financial attention. The primary purpose of an emergency fund is to provide a financial safety net to avoid debt or financial hardship during such situations. Typically, these funds have cash and cash equivalents with short-term maturities equal to 3-6 months of your annual income. Having an emergency fund can provide peace of mind and financial stability in the face of life's uncertainties.

A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck. The you money invest and the earn in this account will act as your income when they retire. Many employers offer a matching contribution, adding an incentive to save. The IRS sets annual contribution limits, which for 2024 are $19,500, with an additional $6,500 catch-up contribution for those 50 and older. Employees can choose from various investment options, such as mutual funds, stocks, bonds, and money market funds. You can withdraw money invested and earned in this account at the age of 59 1/2. If you withdraw the money sooner, you will incur a penalty fee and regular income taxes. Starting at age 72, required minimum distributions must be taken. A 401(k) provides significant tax benefits, potential employer contributions, and a range of investment choices, making it a powerful tool for retirement savings. There are two types of 401(k)s: Traditional 401(k)s and Roth 401(k)s.

Traditional versus Roth 401(k): A Traditional 401(k) and a Roth 401(k) are both employer-sponsored retirement savings plans, but they differ primarily in tax treatment, contributions, and withdrawals. Contributions to a Traditional 401(k) are made with pre-tax dollars, reducing taxable income for the contribution year, and withdrawals are taxed as ordinary income during retirement. In contrast, Roth 401(k) contributions are made with after-tax dollars, offering no immediate tax deduction, but qualified withdrawals during retirement are tax-free. These differences in tax treatment make the Traditional 401(k) beneficial for those seeking immediate tax relief, while the Roth 401(k) is advantageous for those expecting to be in a higher tax bracket in retirement, allowing for tax-free income later.

An IRA is a retirement account you can open through a broker or bank. This retirement account is separate from your employer-sponsored plans. Similar to 401(k)s, the money within an IRA cannot be withdrawn until you are 59 1/2 years old. IRAs provide a wide range of investment options, including stocks, bonds, mutual funds, and ETFs, allowing for personalized retirement savings strategies. IRAs are a flexible and advantageous option for building retirement savings independently. There are two types of IRAs: traditional IRAs and Roth IRAs.

Traditional versus Roth IRA: Traditional IRAs allow for tax-deductible contributions, with investment earnings growing tax-deferred until withdrawal, while Roth IRAs feature contributions made with after-tax dollars, offering tax-free growth and withdrawals. The IRS sets annual contribution limits, which for 2024 are $6,000, with an additional $1,000 catch-up contribution for those aged 50 and older. Eligibility for Roth IRA contributions depends on income levels, whereas Traditional IRAs have no income limits for contributions, although the tax deductibility may be restricted based on income and employer-sponsored retirement plan participation. Traditional IRAs impose a 10% early withdrawal penalty and income taxes for withdrawals before age 59½, with some exceptions, while Roth IRA contributions can be withdrawn penalty-free at any time, with earnings subject to penalties and taxes if withdrawn early. Additionally, Traditional IRAs require minimum distributions starting at age 72, whereas Roth IRAs do not have required minimum distributions during the account holder's lifetime.

Taxable brokerage accounts are investment accounts that allow individuals to buy and sell a wide range of securities, such as stocks, bonds, mutual funds, and ETFs, without the tax advantages associated with retirement accounts like IRAs or 401(k)s. A taxable brokerage account is an investment account used to work towards short-term and long-term financial goals. The money can be kept in this account for as long as you see fit, but it is important to focus on long term goals to protect your portfolio from distraction from short-term market fluctuations. Taxable brokerage accounts offer flexibility, allowing investors to withdraw funds at any time without penalties, making them a versatile option for saving and investing for various financial goals outside of retirement.

Dollar Cost Averaging (DCA): DCA is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. This investing method can protect investors from missing out on market opportunities when they incorrectly try to time the market. It can limit the effect of distraction short-term market fluctuations have on a portfolio by preventing investors from acting on an impulsive investment decision.

There are three stages of the financial lifecycle. In each stage, you will incur different goals and needs that might cause you to adjust your savings and investment strategies. Utilizing your accounts differently in each stage of the financial lifecycle can help you adjust your tactics to optimize your wealth management plan. The three stages include: Asset Accumulation, Conservation/Protection, and Distribution/Gifting.

The asset accumulation stages of your financial lifecycle include early adulthood and starting a family. In early adulthood, the focus is more on debt repayment, budgeting, and saving. This stage includes debt incurred from education. In this stage, it is important to focus on developing a budgeting and savings plan to build a strong foundation for your future. In the starting a family phase, financial needs often shift away from dept repayment and saving and investing beyond a 401(k) become more of the focus.

• Understanding each account type and the various benefits of each can help you know how to best allocate your wealth for your financial goals.
• Retirement plans substitute your income when you retire, and it is important to consider investing in them early on in your financial journey.
• Understanding each stage of the lifecycle earnings lifecycle can help you identify where you are in your financial journey and what is important to focus on at the current phase of life you are in.

If you'd like to learn more about these topics as they relate to young investors, you can contact our presenters Byron Mandell and Jake Hianik.

Sources:

1. College For Financial Planning. (2022). General Financial Planning,
   Principles, Professional Conduct, and Regulation.
2. Investopedia. (n.d.). Roth vs. Traditional IRA: Which Is Right for You?
   Retrieved from https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/.
3. Investopedia. (n.d.). Roth 401(k) vs. Traditional 401(k). Retrieved from
   https://www.investopedia.com/roth-401k-vs-traditional-401k-8599695#:~:text=Key%20Takeaways&text=Traditional%20401(k)%20contributions%20are,traditional%20401(k)%20accounts.
4. SmartAsset. (n.d.). Financial Planning Life Cycle. Retrieved from
   https://smartasset.com/advisor-resources/financial-planning-life-cycle.