A Modern Blueprint for Financial Longevity and Prosperity.
Envision yourself at 80 or 90. It might seem a world away, but given the leaps in health and technology, it's a reality many of us will live to see. More than just surviving, you'll likely be thriving — launching new ventures, traveling, exploring, and even starting businesses.
However, here's the truth: longevity requires liquidity. Your aspirations, adventures, and activities will be fueled by your financial decisions in your 20s and 30s. Gone are the days when retirement meant winding down. The future is about ramping up, changing lanes, and diving into new experiences. But every pivot and every passion comes with a price tag.
"At Outset, we don't use the word 'retirement'—to us, it's a 'dirty word' because we believe no one truly retires. Instead, it's about preparing for an active and fulfilling future. Remember, 59½ is a significant milestone, as it's when you can access many of the financial tools highlighted in this section. Long-term savings is about creating a self-sustaining financial ecosystem for a lifetime of ambitions. Soon, you'll transition from being employed by someone else to essentially employing yourself. Your "paychecks" in the years ahead will come from the investments you make now. The depth of your pockets then will be determined by the wisdom of your choices now.
“Financial safety first” isn't just a mantra; it's a mindset. When you feel financially safe, you are not anxious. By securing your financial footing early on, you're not just guarding against unpredictability; you're laying the groundwork to take bigger, bolder steps later. Mentally you will be stronger. Think of it as the safety net that lets the trapeze artist perform without fear. Your solid financial foundation is that net, giving you the confidence to swing high and reach for those ambitious dreams.
Dive into this section with seriousness. The tools and strategies listed here are your tickets to a future where age is just a number, and ambition knows no bounds.
1. Harness the Power of the Roth IRA
The Roth IRA is a financial tool/product used to build up retirement savings. With a Roth IRA, you pay taxes upfront but then witness your money grow tax-free with no taxes upon withdrawal. This isn't just about "retirement" as we once knew it, it's about financial empowerment for a future where we're constantly redefining what retirement means. It's versatile. You can open one at almost any bank, making it an essential tool for gig workers and freelancers. And while there are income contribution limits, there are ways around them. So, don't think of this as saving for a traditional retirement. By starting in your 20s, a Roth IRA lets you harness compounding interest and tax advantages and ensures you're financially equipped for every twist and turn of life's journey.
What to Know:
Roth IRA Explained: With a Roth IRA, you contribute post-tax dollars. The big win? You withdraw your savings tax-free later, which is a huge plus if tax rates climb or you find yourself in a higher tax bracket by then. Drum roll - do not forget all of the interest and compounded value is tax-free!
Starting Young Benefits: The magic of compounding is real. Start early, and even small contributions can snowball into significant amounts. Think of it as planting a small seed today for a forest in the future.
Tax-Free Growth: One of the Roth IRA's crowning glories is its tax-free growth. You're free from taxes on investment gains. The earnings from your contributions keep building on themselves, leading to potentially larger returns.
Tax Advantages: Although Roth IRA contributions don't offer an upfront tax break since they're made with after-tax dollars, the key advantage is on the back end: your earnings and withdrawals are typically tax-free.
Flexibility: Roth IRAs have a unique feature: you can pull out your contributions (not the earnings) before "retirement" without incurring penalties. This creates a financial safety net if you need funds in a pinch.
Where to Start: Roth IRAs are available at most banks and brokerage firms. It's wise to shop around, looking for fees, available investment choices, and user experience.
Immediate Benefits: The real reward begins the moment you start. Each investment in a Roth IRA is a step towards greater financial autonomy and assurance. Starting one helps build financial competence and self-esteem.
Contribution Limits: Based on 2022 data, if you're under 50, you can chip in up to $6,000 annually. Those 50 and up can add an extra $1,000, making it $7,000. It's good practice to check with the IRS yearly for any updates.
Income Limits: Remember, your eligibility to contribute to a Roth IRA depends on your modified adjusted gross income (MAGI). If you earn above specific amounts, your Roth IRA contribution might be limited or even disallowed. Always check the latest from the IRS.
Questions To Consider:
1. How might an early start with a Roth IRA shape your financial future?
2. Are you clear on the tax perks of a Roth IRA compared to other retirement options?
Next Steps:
- Begin your search for a Roth IRA provider, perhaps starting with established banks.
- Once you've chosen, make your initial contribution. Think about setting up monthly auto-deposits for consistency.
Completed:
- Opened a Roth IRA and made an initial contribution
- Set up recurring, automatic deposits.
Did you know: Peter Thiel is the co-founder of PayPal and an early investor in Facebook. ProPublica said Thiel started a Roth IRA with less than $2,000 in 1999. He then used the IRA to purchase shares of then-private PayPal for fractions of a penny. When PayPal later went public and was subsequently bought by eBay, the value of those shares exploded. Thiel reportedly continued to make private investments from that IRA, growing its value substantially. By 2019, Thiel's Roth IRA had grown to a staggering $5 billion. He did this using a using a Self-Directed IRA.
FYI: Self-Directed IRAs: To make unconventional investments like private stocks, real estate, or startups, one would typically use a Self-Directed IRA. These allow for a broader range of investments beyond traditional stocks and bonds.
Risks: While the potential rewards are high, so are the risks. Many startups fail, which could mean a total loss of the invested amount.
Tax Benefits: The growth and withdrawals from Roth IRAs are tax-free, which can lead to significant tax savings for someone who sees substantial growth within their account, like Thiel.
Controversy: Such massive accumulations of wealth in IRAs have led to debates about the intent and future of the Roth IRA structure. Some argue these accounts were not intended to shelter such vast fortunes from taxes. Thiel's story is captivating, but it is exceedingly rare.
2. Maximize Your Employee Benefits/401K
Beyond the paycheck, your job can offer many benefits that bolster your financial stability. It's not just about health insurance. Think 401(k), HSA accounts, commuting benefits, and more. Not diving into these? You might be leaving money on the table.
What to Know:
401(k) Matching: If your company offers this, it's like free money towards your retirement. Ensure you're contributing enough to maximize any employer match.
Diverse Benefits: From Health Savings Accounts (HSA), to commuting perks and continuing education programs, these benefits can save you significantly over time.
Seek Guidance: Not sure where to start? Your HR department is there to help. Don't hesitate to ask them about all the benefits available to you.
For the Gig Workers: Traditional 401(k) plans might not fit your financial scenario. Consider exploring alternatives like a SEP IRA, Roth IRA or investing in S&P 500 Index Funds for long-term savings.
401(k): It's a retirement savings account many employers offer. A 401(k) is a way to save for retirement with some tax advantages, but it restricts when you can access the money. While a 401(k) is a traditionally one of the best options, given the tax benefits and potential employer match, they can be very restrictive and will charge penalties if you need early access to funds. So, it might not be the best savings vehicle for everyone. Depending on your financial goals, options like IRAs or taxable investment accounts could be more fitting and more profitable.
Pros (Advantages):
1. Tax Breaks: Money you put into a 401(k) isn't taxed now. Instead, you'll pay taxes when you withdraw it in retirement.
2. Employer Match: Many employers match a portion of what you contribute, giving you "free" money for your retirement.
3. Automatic Deductions: Money is taken directly from your paycheck, making saving easier.
4. Investment Growth: The money in your 401(k) is invested, which can grow over time.
Questions To Consider:
1. Do you truly understand the benefits and limitations of your current health insurance?
2. How prepared are you for the transition once you turn 26?
3. Are there health services you’re paying for that could be reimbursed?
4. Have you researched your employee Health Benefits?
Next Steps:
- Thoroughly review your health insurance. Understand what it covers, and note any key dates or check-ups.
- Approaching 26? Don't wait till the last moment. Start your research on your next health insurance plan now.
- Research Employee Health Insurance Plans
Completed:
- Understood and maximized the benefits of my health insurance.
- Prepared a transition plan for post-26 health coverage.
3. Make Your Money Work: Saving vs. Investing
Making your money work for you is a crucial financial principle. With terms like 'saving' and 'investing' often used interchangeably, it's essential to understand the nuances to make informed decisions. At this stage of life, money doesn't grow on trees. But with some knowledge and action, your money can grow independently. Let's dive into how to differentiate 'saving' from 'investing' and maximize both. But first a myth buster about investing, did you know most of the long-term wealth is about how much you save, not how you invest, so avoiding "market timing" or "stock picking", or fads like Crypto, NFTs, “Meme-stocks" is smart.
What to Know:
The Magic of Compound Interest: Think of compound interest as your money's multiplier effect. It's not just your principal amount (the initial sum) that earns interest; the interest you've earned previously also starts to make its own interest. Imagine starting with $100, which grows by 10% in a year. By year-end, you have $110. Now, in the second year, you're not just earning 10% on your original $100, but on the total $110, giving you $121. This snowball effect can grow exponentially over time, turning even small investments into significant sums. That’s why starting your savings journey early can be so impactful!
Places Where You Can Access Compound Interest:
High-Yield Savings Accounts: Online banks often have the upper hand here, giving better returns than the old-school brick-and-mortar banks.
Certificates of Deposit (CDs): Lock your money in for a certain period, and you get a higher interest rate in return.
Stock Market: When you buy shares, you buy a piece of a company. Whether it's individual company shares or index funds that track a broad market, the potential returns can be higher, but they also come with more significant risks than traditional savings. However as the company or the market grows, so does the value of your investment.
Bonds: These are essentially loans you give out (to companies or governments), and they pay you interest in return.
Real Estate: If you're considering buying property, know the risk and added expenses and its ability to appreciate over time. Plus, if you're renting it out, that's another income source.
Life Insurance: Some plans allow a portion of your contributions to grow and compound over time. Look at Whole Life Policies.
IRAs and 401(k) Plans are ways to put your money in diverse products, allowing it to grow more efficiently.
Decoding the Jargon: These terms are comingled. A 401K is an investment and savings product. The term investor makes many people uncomfortable, so they shy away from making smart money moves. Our self-image has a large impact on our financial health. Be confident as well as thoughtful. You are an investor and a saver.
- Saving: Think of this as your financial safety net. It's about security and accessibility, like depositing money in a digital piggy bank. The primary goal is to preserve your money and earn a modest interest.
-Investing: This is your growth engine. While risks are involved, you aim for a more significant return on your money. It's about allocating resources to assets like stocks, bonds, or real estate and betting on their appreciation over time.
Questions To Consider:
1. Are you making the most of compound interest?
2. Are you more of a saver, an investor, or striking a balance between both?
3. Which investment avenues are you most curious about?
Next Steps:
- Explore more about the investment options listed above.
- Are you educating yourself about the meaning of standard terms?
- Set a monthly goal: a part of saving and investing.
Completed:
- Explored and invested in at least two avenues mentioned above.
- Set and followed a monthly financial goal for three consecutive months.
- Learned _______ new terms
FYI: The best way to learn about money is by diving in. Start small to familiarize yourself with buying stocks, bonds, or CDs. Even with just $50 to $100, you can gain valuable insights by purchasing, observing, and selling. Remember, today’s financial “gurus” didn't just wake up experts,they learned through hands-on experience. So, give it a go!
4. Automate Your Savings
Set up automatic transfers from your checking account to your savings or investment accounts. This takes the decision-making out of saving money, ensuring consistent, habitual savings. It's a strategy to guarantee you regularly set money aside without thinking about it. Automate your 401k, as well as split your paycheck so that some portion is directly deposited to an investment/savings account, not your daily/checking account.
What to Know:
Consistency: Automating ensures you consistently save a designated amount every month or week.
Peace of Mind: Once set up, you don't have to remember to transfer money manually.
Flexibility: You can adjust the amount or frequency based on your financial situation.
Questions To Consider:
1. How much of your monthly income are you comfortable setting aside automatically?
2. Which accounts would benefit the most from consistent, automated contributions?
Next Steps:
- Review your monthly expenses to determine a comfortable auto-save amount.
- Set up automated transfers with your bank or investment platform.
Completed:
- Reviewed monthly finances.
- Established automated transfers.
5. Master the Art of Diversification
In the world of investments, there's an age-old adage: "Don't put all your eggs in one basket." This speaks directly to the importance of diversification, ensuring you spread your financial resources across various assets to mitigate risks. Doing so can better shield your investments from unforeseen market shifts and economic downturns.
What to Know:
Understanding Diversification: At its core, diversification is about spreading your investments across different assets such as stocks, bonds, and real estate. This strategy ensures that a decline in one sector doesn't jeopardize your entire portfolio. The more diversified your investments, the less likely they are all to move in the same direction simultaneously.
A Practical Example: Consider your 401K. It might be tempting to invest heavily in your own company's stocks, but that's a risky move. Why? If the company faces challenges, not only is your job potentially at risk, but your 401K could take a significant hit as well. By diversifying, you guard against these dual losses.
Diversification: Tools: Index funds, which track a broad market index like the S&P 500, offer an easy way to diversify the stock market. Mutual funds are also designed to invest across various asset classes, giving investors a diversified portfolio in a single fund.
Questions To Consider:
1. Am I adequately diversified in my investments?
2. Where might I have unintentional overlaps or vulnerabilities in my portfolio?
Next Steps:
- Evaluate your current portfolio for diversification gaps.
- Consider speaking with a financial advisor or online tools to further diversify your investments.
Completed:
- Reviewed and diversified my investment portfolio.
- Consulted a financial advisor or utilize online resources for diversification guidance.
6. Navigating Cryptocurrencies with Caution
Cryptocurrencies powered by blockchain technology represent a new frontier in the financial world. Be aware that Cryptocurrencies are almost purely speculative - it's effectively the currency of an imaginary country. Unless you deeply understand the economics, and might be comfortable trading your actual savings for the currencies of other nations, especially those with weak monetary policies and limited true foreign currency reserves, move on. This can be an interesting (or maybe even fun investment), but given the complexity and risk, it should be a very minor portion. You must assume you will lose your money. Solidify your financial foundation before considering this volatile investment.
What to Know:
Blockchain: Imagine a ledger that records transactions across multiple computers. This ledger ensures all records are transparent and secure from tampering, thanks to advanced cryptography. That's essentially what blockchain is. It's the technology behind cryptocurrencies that ensures transactions are open, verifiable, and permanent without needing a central authority, like a bank. This decentralization is what makes cryptocurrencies like Bitcoin revolutionary.
Understanding Before Investing: Grasping the concept of blockchain and the principle behind cryptocurrencies is essential.
Risk Factor: Cryptocurrencies are in the news for large returns to a few but are notoriously volatile. Only invest what you're prepared to lose.
Diverse Landscape: Beyond Bitcoin, many 'altcoins' exist, each with unique potentials and risks.
Build First, Venture Later: Ensure you have a robust financial foundation, including an emergency fund and an understanding of traditional investments, before diving into crypto.
Questions To Consider:
1. Do you feel you understand the basics of blockchain and its significance?
2. Have you set up basic financial safety nets?
Next Steps:
- Focus on building a strong financial foundation: an emergency fund, basic investments, and insurance.
- If and when you're ready to delve into cryptocurrencies, begin with comprehensive research on blockchain tech, market trends, and associated regulations.
Completed:
- Established a solid financial foundation.
- Conducted preliminary research on blockchain and cryptocurrencies.
