Although it may not be front and center when you are a young adult, it is vitally important to plan ahead for retirement. Saving and investing over the course of your career ensures a comfortable life after leaving the workforce. Social Security benefits are limited and defined benefit pension plans are becoming increasingly rare in the private sector. Thus, it has never been more critical to make long-term financial planning decisions. Jack Plotkin, a former Goldman Sachs banker and investment strategist, offers helpful advice for retirement and conventional investing.
The case for retirement investing
The initial consideration is choosing between an employer’s defined-contribution plan and an individual retirement account. Working individuals now have access to a lot more information relating to financial markets and investment options. While there are limitations on what can be done with a 401(k) and other retirement plans, there are also substantial advantages to retirement plan investing. “There are major tax advantages,” notes Plotkin. “Take a $2,000 contribution to a 401(k). You’re saving about a third off the bat through the tax break against income. Then, any capital gains you make until retirement are tax free.”
An additional perk to a 401(k) plan is that many companies offer a matching contribution. “Some employers match 50% of an employee’s contribution, some match 100%,” says Plotkin. “That is essentially free money that you otherwise would not receive. For many people, maxing out their 401(k) is the best long-term strategy. But keep in mind that withdrawing early means paying taxes in full plus a 10% penalty. So, you have to be comfortable with your regular savings to see you through the highs and lows of daily life before overcommitting to a 401(k).”
If an employer does not have a 401(k) plan or it does not offer matching contributions, there are other options for retirement investing, Plotkin points out, like an individual retirement account (IRA) that can be set up at banks or brokerage firms. An IRA account can qualify for some tax deductions, but usually not to the extent of a 401(k) plan. A popular form of IRAs is Roth IRA, which is not tax deductible but lets the account holder pay income taxes up front. This makes post-retirement withdrawals tax-free. Other types include SEP IRAs and simple IRAs, which are used by self-employed individuals and small-business employees, respectively.
The case for conventional investing
People with financial goals beyond simple retirement often opt for direct investing in the financial markets. Similarly, circumstances such as a down payment on a house, college education for children, or unexpected health problems can overshadow retirement needs that will not be relevant until decades down the line.
“Retirement investing should be viewed as a complement to, rather than a replacement for, regular financial investing,” explains Plotkin. “When you invest your savings in the markets, you are completely in control of your financial destiny. There is no age or investment type limits.”
In both cases, Jack Plotkin warns against the dangers of taking on too much risk. “Each asset and asset class has its own volatility profile and its own level of correlation with the markets,” he says. “Before investing a single dollar, you should understand the asset and how it fits within your risk profile. And even if you are a risk lover, balance and diversification are still important.”
Jack Plotkin and the bottom line
Whatever type of investing one prefers, Jack Plotkin highlights the importance of understanding not only the asset but also the fees and taxes related to the investment. “Day and swing traders expose themselves not only to high volatility but also significant short-term capital gains taxes,” explains Plotkin. “Depending on the trading platform, they may also incur material brokerage fees.”
Jack Plotkin suggests that successful investors tend to start early, particularly given the general long-term direction of the markets and the power of compounding. An individual who begins saving at 25 is likely to be significantly better off than someone who starts at 35 by the time each retires. Since making a retirement plan is one of the most important financial decision in one’s life, individuals who do not feel confident in their financial knowledge should consider seeking advice from a financial advisor.
“I get it,” says Plotkin. “When you are young and single, you’re not worried about retirement or a balanced risk profile. You’re barely thinking thirty days from now, let alone thirty years from now. But my advice is start small, but start early. Good habits and in-depth understanding take time to develop.”