Where Should I Invest My Money?

29Apr08

Do you have to invest all of your investment money into retirement? No. A non-retirement account can be used as a part of your savings so that you can tap into it before you retire without any penalties. Lets take a look.

Conservative Investors Say..

  1. Fund 401k up to the maximum employer contribution
  2. Fund Roth IRA to the yearly maximum
  3. Fund 401k to the yearly maximum
  4. Fund non-retirement (taxable) accounts

The Fratboy Investor Says…

  1. Fund 401k up to the maximum employer contribution
  2. Fund Roth IRA to the yearly maximum
  3. Fund non-retirement (taxable) accounts
  4. Fund 401k up to the yearly maximum

Why?

I suggest funding taxable accounts before maxing out your 401k yearly limit because you can withdraw money from a taxable account any time you want. You don’t have to wait until you are retired at the age of 65. Pundits may disagree, but ten years from now maybe I’ll want to put a down payment on a Benzo? You might say, “but isn’t that what savings are for?” You are absolutely correct, however the stock market can return over 10% annualized over a 10 year period, that beats the pants off of 3%-5% in a high yield-savings account.

The best bet is to continue saving in a high-yield savings account, in conjunction with a taxable account with the intent of holding it for the long term (7+ years).

The Caveat

You aren’t fully maximizing your retirement dollars for the sake of making money before you are 65.

So Whats My Asset Allocation Going To Be?

Treat all of your accounts as two separate portfolios. All retirement accounts: 401k, Roth IRA, Taxable (if you choose) are considered your retirement portfolio, and all taxable accounts are considered your non-retirement accounts.

Now choose an asset allocation for your retirement; I would stick with 80% stocks and 20% bonds given my relatively young age.

Now choose an asset allocation for your taxable portfolio; I would be vested in 100% stocks since adding bonds into this account can take away from your returns due to taxes.

The Takeaway

Folks right out of college have higher priorities than investing. Buying a new car, a house, or getting married are all part of real life. To maximize the growth potential of the stock market and the expenditures of being a successful person means balancing your retirement and your long term goals.

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