Focus on Goals and Time Horizon

Jerry Jarzabek, CFP, CPWA, Director of Private Wealth Management with The BCJC Group of Baird, recently joined us on Barnes Wendling’s “Better Business With Barnes” podcast to discuss investment planning for college students and young professionals. Listen to our podcast and read about his recommendations below. 

For college students and young professionals, goal-focused investment planning can provide a kickstart to saving for retirement that will result in a big payoff over time.

The key is discipline and consistency. Look at saving for retirement – or a home purchase and other big-ticket items – like paying a bill. Set a reasonable amount that you can save monthly and feed your savings or investment accounts just like a monthly rent or utility bill.

Roth IRA – Most Valuable Investment Planning Tool

One of the most valuable tools available to young people is the Roth IRA. As a retirement saver, you’re never too young to start a Roth IRA, and you should start as soon as you have earned income. That would be W2 wages or 1099 income that you would report on a tax return.

Best Practice: Feed your Roth IRA regularly, and don’t worry about not having access to that money for 40 years. If you have an unforeseen financial crisis, you can withdraw a portion of the principal tax-free and penalty-free. But every effort should be made to leave this money right where it is so you can enjoy the tax-free earnings in retirement.

To illustrate the value of a Roth IRA, a young person who started saving $2,500 a year in a Roth at age 25 would have $534,024 at age 65, assuming an average rate of return of 7%. The investor’s total contributions to the IRA would be $100,000. Since Roth IRAs are fed with after-tax contributions, the distributions are tax-free in retirement.

Goal-Focused Saving and Investing

Goal-focused saving and investing means having a clear idea of what you are saving for and understanding the difference between a long-term investing horizon such as retirement, which is 40 years or so in the future, and investing or saving for medium-term or short-term goals, such as buying a house or paying for a child’s education.

The time horizon of your goals will determine the level of risk and the mix of investments in your portfolio.

Even when there are dips in the economy or volatility in the markets, over time equity stocks tend to rise in value. So, for long-term saving, such as for retirement, a heavier emphasis on stocks makes sense. For medium-term goals, such as paying for a child’s college education, the horizon isn’t that long, and balancing a portfolio with safer instruments such as bonds makes sense. If the savings goal is short-term – such as buying a house in three to five years – it’s best to cut back on growth instruments that tend to be riskier and focus savings on cash, CDs, and savings accounts.

The Allure of ‘Meme Stocks’

Social media has disrupted many segments of the financial landscape, including stock market investing, and this has had a pronounced impact on young investors. A growing list of social media sites such as Reddit, WallStreetBets, and Twitter attract followers who drive spikes in certain company stocks that are often unrelated to the companies’ fundamentals. Some investors make a lot of money on these stocks; others lose big.

Young investors are attracted to these sites and the stocks they tout. The good news is that the so-called “meme stocks” have gotten many young people involved in the stock market and they are learning how to invest. But it’s important to understand what goes up usually comes down, and you shouldn’t invest money that you can’t afford to lose in a speculative or spiking stock.

Reach Your Investment Planning Goals 

The most important choice young people can make about investing for long-term goals is to start doing it. The next most important choice is how to invest that money. Aligning your investments with your personal financial goals and understanding how to balance your investments against your expected time horizon is key. An experienced financial planner or investment advisor can help you figure out your best saving and investment strategy to reach your goals.

If you would like to discuss saving and investment planning for yourself or for a young person in your life, contact your Barnes Wendling advisor.

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