By Andy Newell, CISP, Investment Officer, Emerging Investor Market
As noted in the first part of this two-part blog, “Getting Started as an Investor,” the importance of investing for the future may be self-evident, but knowing where to begin can seem like a challenge. At The National Bank of Indianapolis, we work with new and experienced investors to help them realize their goals, with an approach tailored to their needs.
For the purpose of this series, we are defining “investing” as allocating your available resources to those opportunities and pursuits that afford you the greatest chance of realizing your goals. Once you have established a budget and defined goals, it is time to consider the financial tools that may be available to you. These are a few general options that can give you some ideas of where to begin. Working with a financial professional, like the investment managers at The National Bank of Indianapolis, can help you determine what tools are right for you.
- Traditional savings accounts - Ideal for building emergency savings to cover unforeseen income loss or sudden expenses, a traditional savings account can be set up by a financial professional at your bank or institution of choice.
- Employer opportunities - For retirement savings, often the best place to begin is with your employer. Does your employer offer a retirement plan such as a 401(k), 403(b) or SEP IRA? If your employer offers any sort of matching incentive for contributions made to your retirement account, try to contribute enough to receive all the match offered.
- Roth and 401(k) retirement - Learn if your plan offers a Roth provision, which allows you to contribute after-tax money (thus paying the tax now, while your income—and tax rate—is likely lower than it will be later in life) that then grows tax-free, a powerful tool for someone in their earlier earning years.
In the absence of a Roth provision, 401(k) and similar plans allow you to make pre-tax contributions of income, reducing the amount of tax you pay now. Later in life, distributions from these accounts are taxable to you as income, an effective method when your current tax rate is higher now than it will be in retirement. That said, even if you are just starting out and your tax rate may not be appreciably higher than you anticipate it will be in retirement, investing now in the plan available to you will pay dividends over time as your investments compound. - IRA - If an employer plan is not available to you, or if you want more flexibility in either how you invest or how you can access your money, an Individual Retirement Account (IRA) may be appropriate. The two main types are Roth and “traditional,” and they differ from each other in much the same way as Roth and non-Roth plans described above. Roth IRAs allow you to make after-tax contributions that can then grow tax-free, whereas traditional IRAs allow you to make deductible contributions that then grow tax-deferred. Note, however, that the ability to make contributions to these accounts is dependent upon your tax filing status, income and other factors. Also, you may incur penalties (in addition to any applicable taxes) if you withdraw money without having met certain conditions.
- Non-qualified accounts - You can also consider so-called “non-qualified” accounts, which are investment accounts that are not tax-free retirement accounts. Generally, these accounts are not subject to restrictions on contributions or income, nor are withdrawals subject to penalty, but any income and realized gains are subject to taxes.
The next critical concept to understand is your “risk tolerance.” Different investments carry different amounts of risk, so assessing just how much risk you can afford to take will inform how your investments should be allocated. In general, stocks are riskier than bonds, which are riskier than stable value/money market assets. Usually, the younger you are, the more risk you can take, and the more aggressively you can allocate your investments. As you age, preserving your investments gradually takes precedence over growing them, and you will want to shift your allocation to more conservative options.
When it comes to investing, many wonder whether to work with an investment manager or not. There are brokerages that offer a self-directed approach wherein you manage your own security selection and asset allocation. Doing so can be cost-effective, but working with an advisor affords you access to a professional’s experience and expertise. An investment manager can help you to identify your goals and risk tolerance and recommend an appropriate plan. Certain advisors also serve as fiduciaries, meaning they are legally obligated to act in the best interest of their clients rather than their own. The right advisor will be up front about their fees and cost structure, take the time to understand your situation and serve as a fiduciary. At The National Bank of Indianapolis, our investment managers at Diamond Capital Management and Market Street Fund Management are dedicated to helping you realize your goals.
To learn more about investing with The National Bank of Indianapolis, connect with our specialists at https://www.nbofi.com/wealth-management/investing/meet-our-specialists.