by Leah Woodly
Contributing to your employer-sponsored retirement plan is now a no-brainer. You’ve gotten settled with contributing and you are contributing enough to get your employer match. You feel like you should be doing more, but what does that look like? This is a common question we get, especially from young nurses. There is an urge to feel like you should be doing something else instead of just contributing to your 401(k).
First things first, everyone’s situation is unique. I know your friends may be investing in crypto, have a Robinhood account and dabble with penny stocks, but just because they are doing it doesn’t mean you should. Before you start investing outside of your retirement plan, there are some other things you should consider.
1) Have you paid off all high-interest debt?
If you have high-interest debt, you know the 20% Discover charges you have when you carry a balance from month-to-month, then you should focus on paying that off first. Paying off high-interest debt gives you a guaranteed return and also frees up cash flow for you to be able to do other things, like invest.
2) How will the money you plan to invest be used?
It is very important to understand that the money you invest should have a purpose. That purpose will determine how you invest. Someone who is planning to invest to build a down payment for a home that they plan to purchase two years from now would invest differently than someone who plans to build a cabin ten years from now.
3) Do you have sufficient emergency reserves?
Before you consider investing beyond what’s required to get your employer match, consider whether or not you have enough money in emergency reserves. Emergency reserves exist to cover those unforeseen circumstances that tend to pop up. Your emergency reserves allow you to be your own bank and keep you from utilizing debt. While you may have heard to save 3 to 6 months worth of expenses, you want to be sure you have enough in emergency reserves to make you feel comfortable and secure. That amount may be dependent on your job security and the amount of other streams of income you have in your household.
Once you can check these items off your list, then you may be ready to invest outside of your retirement accounts. The first investment vehicle you may want to consider is a Roth IRA. A Roth IRA allows you to pay taxes on your investment contribution up front in exchange for potentially tax-free withdrawals on your earnings down the line. A Roth IRA is considered a retirement investment vehicle, so you cannot withdraw your earnings until you reach 59-½. However, you can withdraw your contributions at any time without tax or penalty. The Roth IRA can provide you with the flexibility you may need if you need funds prior to age 59-½, but also serves as a great retirement vehicle to use once you reach retirement age. We encourage nurses who are not at their peak earnings potential to utilize a Roth as the ability to contribute to a Roth phases out once you reach certain income levels.
While you are contributing to a Roth IRA, you can also establish what we coined as a “slush fund.” A slush fund is an Individual or Joint Brokerage account that serves as an extension of your emergency reserves. This fund allows you to save for larger purchases that may be down the line, like a downpayment for a house, a new car, or going back to school. A slush fund can be setup with reputable firms like Fidelity or Vanguard and you can contribute to the fund on a regular basis. The slush fund or brokerage account is a taxable investment; any withdrawals made from this account will have some form of capital gains taxation.
With both the Roth IRA and slush fund, how you invest your contributions should be dependent on the timeframe in which you would need the funds. For example, if you plan to buy a home in three years, you would need to invest differently than, if you were planning to buy a home ten years from now. The closer the timeframe, the less volatility you should have in your portfolio, meaning your portfolio should not be 100% stocks if you will need the money in a few years.
It is very important that you establish a solid foundation before investing outside of your retirement account. Be sure to pay off high-interest debt and establish a comfortable emergency fund. Then, you are ready to utilize other investments in order to finance your quality-of-life goals.