Financial Literacy

VLFCU is thrilled to introduce a new digital financial education initiative through our partnership with MoneyEDU. The program provides our community with an engaging learning experience around critical personal finance topics such as building emergency savings, managing debt, mortgage education, and retirement planning.

Highlights of the program include:

  • A series of interactive courses on key financial topics.
  • Includes several financial tools and calculators.
  • Mobile and tablet enabled so you can learn anytime, anywhere.
  • It’s FREE for everyone!

Your financial well-being is important to us and we are committed to providing you with resources to manage your money. Click here to get started and become financially empowered!

For additional educational and consumer resources, we recommend that you visit the website for the National Credit Union Association. There you will find curriculum guides for teachers, finance & budgeting games for youth and teens, consumer protection updates, and government resources specific to veterans, service members and their families.

Need help consolidating debt, improving your credit score, or saving for the future? Stop by any of our branches or call us today at 1-800-691-9299. It’s always our pleasure to serve you!



Investing for Retirement

This week, we'll explore strategies related to saving for retirement. From minimizing fees to protecting your assets, these concepts can help you maximize your nest egg.


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Investing for Retirement

This week, we'll explore strategies related to saving for retirement. From minimizing fees to protecting your assets, these concepts can help you maximize your nest egg.

Why Investing Strategies Matter

When working to achieve a long-term financial goal, like a secure retirement, saving money is only part of the equation.
A woman reviews her investments.

When working to achieve a long-term financial goal, like a secure retirement, saving money is only part of the equation. How you invest and manage your savings can make all the difference.

An investing strategy is a plan or approach that guides your decisions on allocating your savings across various investments, such as stocks, bonds, or money market funds. And since different types of investments involve different risk levels, an investing strategy's goal is to grow your money and protect it for when you need it most.

This week, we'll explore many of the concepts involved in crafting a personalized investing plan. We'll cover:

Risk Tolerance

Investing always involves some level of risk - whether you're buying stocks, bonds, or other financial products. But how much risk are you comfortable with? Understanding your risk tolerance is the first step toward building a portfolio that suits your needs. We'll explore what it means, how it changes over time (especially as you approach retirement), and why aligning your investments with your comfort level is important.

Asset Allocation

A well-diversified portfolio is key to managing risk and, often, maximizing returns. But how do you know what the right mix of investments is for you? We'll explore approaches to managing risk by spreading investments across different asset classes like stocks, bonds, and cash. You'll learn approaches to building an investment portfolio aligned with your risk tolerance and how your ideal allocation might shift as you get closer to your financial goals, such as retirement.

Active Versus Passive Investing

There are two main approaches to investing: active and passive. Active investing involves making frequent trades to try and outperform the market. In contrast, passive investing takes a more hands-off approach, simply aiming to match the market's overall performance. Which strategy is best for you? We'll break down the pros and cons of each approach, helping you decide whether you want to actively manage your portfolio or let the market do the heavy lifting.

Maximizing Retirement Accounts

Almost everyone has access to tax-advantaged retirement accounts, like 401(k)s, Traditional IRAs, and Roth IRAs, but how to maximize them can be complicated. We'll walk through the benefits of each account type, how to increase contributions, and how to decide which option may be suitable for you. You'll also learn about Roth conversions and strategies to minimize taxes in retirement.

Target Date Funds

If you're looking for a hands-off way to invest for retirement, target date funds might be worth considering. These popular mutual funds automatically adjust their asset allocation based on your expected retirement date, becoming more conservative as you approach that milestone. We'll explain how these funds work, their advantages and drawbacks, and whether they may fit your retirement strategy.

The Hidden Costs of Investing

Expense ratios, management or advisory fees, and transaction fees may seem small, but they can significantly impact your long-term results. We'll look at the different types of fees and how you can minimize these costs. By being fee-conscious, you can keep more of your money working for you, ultimately boosting your investment returns over the long term.

Customizing Your Investment Strategy

Your investment strategy isn't set in stone. Your financial goals and risk tolerance will evolve as your life circumstances change - whether you're getting married, starting a family, or nearing retirement. Investing over your lifetime isn't a one-time decision. So, we'll cover how to regularly review and adjust your portfolio to stay aligned with your long-term objectives. You'll learn about the importance of flexibility, how your investing time horizon may influence your risk tolerance, and how to ensure your financial plan grows along with you.

The Takeaway

There are many approaches to investing, but one thing is certain: the sooner you start saving, the better off you're likely to be.

Every dollar you invest has the potential to earn returns, and over time, those returns can start earning their own returns. It's like a snowball rolling downhill, picking up more snow as it goes - the earlier you start, the longer your snowball has to grow.

This week, we'll explore concepts and strategies for maximizing your savings and helping you grow the biggest "snowball" possible.

Let's get started!

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Understanding Risk Tolerance

Since investing often involves the risk of loss, your risk tolerance is all about balancing potential rewards with the risks.
A woman is surprised by a bill.

What if the market dropped 20% tomorrow? How would you react? Would you be able to stay calm, or would you panic?

Investing is all about balancing potential rewards with the risks you're willing to take. Staying calm during market swings is tough, but understanding your risk tolerance can help you stay the course and protect your long-term financial goals.

Let's explain risk tolerance and how it can guide your investment decisions.

What is Risk Tolerance?

Risk tolerance is your ability to handle swings in the value of your investments. In other words, it's how comfortable you are with the possibility of losing money in the short term in exchange for potentially greater long-term returns.

Here's a simple example:

The NASDAQ stock index has been one of the top performers historically, but it's no stranger to volatility. If you had invested $100,000 in the largest NASDAQ stocks at their peak in 2000 through the popular QQQ fund, your investment would have dropped to $30,000 just a year later. It would have been worth around $35,000 ten years later. In all, it took the index 16 years to recover its losses.

But what if you didn't sell? Today, your investment would be worth nearly $500,000. Great, right? But it depends. If you invested that $100,000 at age 30, you'd have seen significant gains by now. If you were 60? Watching your money shrink by more than half at a typical retirement age would be devastating.

That's why your time horizon - how long until you withdraw your money - is a key part of risk tolerance. But it's not the only factor.

Types of Risk Tolerance

Risk tolerance isn't one-size-fits-all. Investors usually fall into one of three categories: aggressive, moderate, or conservative. Let's take a look at what that means.

Aggressive

Aggressive investors are comfortable with high levels of risk and volatility in pursuit of maximum returns. They're willing to ride out big market swings and tend to invest heavily in stocks, especially growth stocks or other high-risk, high-reward assets. Typically, aggressive investors have a long investment horizon.

Sample aggressive portfolio:

  • 80% stocks (a mix of growth stocks, small-cap stocks, and international equities)
  • 15% bonds (to provide a small measure of stability)
  • 5% alternative investments (like real estate or commodities)

This kind of portfolio is for those who can handle the ups and downs of the market, aiming for higher returns over the long term.

Moderate

Moderate investors are looking for a balance between risk and reward. They're okay with some level of risk for potential higher returns but aren't comfortable with extreme market swings. This approach gives room for growth while still maintaining stability during rough periods.

Sample moderate portfolio:

  • 50% stocks (a mix of large-cap, mid-cap, and international stocks)
  • 40% bonds (a diversified mix of bond types)
  • 10% alternative investments or cash

This portfolio strikes a balance, helping you take advantage of market gains while providing protection against downturns.

Conservative

Conservative investors prioritize safety over growth. They're not comfortable with significant market volatility and prefer investments that offer stability and lower risk, even if it means smaller returns.

Sample conservative portfolio:

  • 70% bonds (government, corporate, and municipal bonds)
  • 20% stocks (blue-chip or dividend-paying stocks)
  • 10% cash or cash equivalents (like money market funds)

This type of portfolio is designed to generate steady income and modest growth while minimizing the risk of loss.

Age and Risk Tolerance

Your risk tolerance isn't static. A 25-year-old is likely to invest differently than someone nearing retirement. The younger you are, the more time you have to recover from market dips, so most experts would suggest that younger investors can afford to be more aggressive. In comparison, those in their 40s or 50s might start shifting towards a more balanced portfolio with moderate risks. And finally, as an investor gets closer to needing their savings to pay for retirement, it might make sense to shift toward a more conservative approach.

This process, known as "de-risking," helps protect your investments based on your life stage and financial goals. The idea is to safeguard what you've earned so you don't have to worry about market crashes when you're ready to start using your savings.

Assessing Your Risk Tolerance

So, how do you figure out your risk tolerance? A few factors come into play:

  • Time Horizon - How long before you need to access your savings? As our NASDAQ example illustrates, the longer your investment horizon, the more risk you can afford to take (though there are no guarantees, no matter your time horizon).
  • Income and Net Worth - The more financial security you have, the more comfortable you might be with taking on risk. Higher-income investors might be able to take more risks with a portion of their portfolio.
  • Emotional Comfort with Risk - Let's face it: market swings aren't fun. If the idea of losing money (even temporarily) gives you sleepless nights, it's worth considering whether that stress is ultimately worth it to you.

Remember, risk tolerance can change over time. Major life events like getting married, having kids, or even switching careers can impact your financial goals and, consequently, how much risk you're willing to take.

Portfolio Reviews and Market Fluctuations

Regular portfolio reviews allow you to assess whether your current investment strategy aligns with your risk tolerance and objectives. Over time, markets can push your portfolio away from its intended mix, making it more aggressive or more conservative than you might like. Rebalancing - shifting funds between stocks and bonds, for example - can help keep your risk level in check with your goals.

Here's one scenario: after a strong stock market performance, your portfolio may be "overweight" in stocks, meaning a larger percentage is invested in stocks than you intended. That could increase your risk exposure without you realizing it. By selling some of those stocks and reinvesting in bonds or other stable assets, you can bring your portfolio back into balance and maintain your intended asset allocation.

But...

One of the biggest challenges in investing is staying calm during market downturns. When your portfolio takes a hit, the temptation to sell is strong, but reacting out of fear can do more harm than good. A well-planned portfolio, based on your risk tolerance, should be built to weather these storms.

Focusing on long-term goals rather than short-term market fluctuations can help you stay the course. Markets have historically recovered from downturns, and a diversified portfolio has the potential to grow even after periods of decline (remember our NASDAQ example?).

One strategy to stay disciplined is dollar-cost averaging, where you invest a fixed amount regularly, no matter what the market's doing. This way, you reduce the impact of market fluctuations, and when prices dip, you're buying at a "discount." But remember, this approach is best for diversified investments like index funds, not single stocks, which carry higher risk. Doubling down on a single stock is significantly riskier since it can lose all of its value!

The Takeaway

Understanding your risk tolerance is crucial for building a portfolio that works for you. Whether you're aggressive, moderate, or conservative, the key is to create a diversified portfolio that reflects your comfort with risk, review it regularly, and stick with your strategy - even when the market gets rocky.

And remember, we've only scratched the surface here. For advice tailored to your situation, talk to a financial professional who can help you make the best decisions for your future.

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Asset Allocation: Growth and Preservation

Choosing investments is about building a portfolio that aligns with your long-term goals and your tolerance for risk.
A man takes notes while using a laptop in his home office.

When investing for retirement, one of the most important decisions you'll make isn't about picking the "perfect" stock, bond, or mutual fund. It's about how you divide your money across different investments. This process is called asset allocation, and it's the backbone of a successful long-term investment strategy.

Why? Because how much you put into stocks, bonds, and cash will ultimately determine both the risk you take on and the growth you can expect. It's about building a portfolio that aligns with your goals - and your tolerance for risk.

Why Asset Allocation Matters

Think of asset allocation as the foundation that supports everything else in your financial plan. You could spend hours researching the best-performing stocks or the safest bonds, but how you allocate your assets across different types of assets may have an even bigger impact. Here's why: stocks, bonds, and cash don't move in the same direction at the same time. Stocks can skyrocket, bonds might stay steady, and cash, well, it's safe but rarely grows faster than the general rate of inflation.

Spreading your investments across these asset classes helps you balance risk and return. Stocks provide the potential for higher returns, but they're also volatile. Bonds offer stability, but their growth potential is limited. Cash? It's there for security but doesn't do much for long-term growth. The magic is in how you blend them. As you get closer to retirement, you'll likely shift your allocation from aggressive (more stocks) to conservative (more bonds and cash). It's about protecting your nest egg while still giving it room to grow.

Building a Portfolio by Decade

Like risk tolerance, there's no one-size-fits-all formula for asset allocation. Your needs change over time, so your strategy should evolve with you. Here's a snapshot of how your portfolio might look at different stages of your life.

Please note that everyone's financial situation is different, and there is no definitive answer to the best way to allocate your investments. The outline below represents what may be appropriate for many investors, but not your unique situation. Please contact a qualified professional for personalized advice on how to allocate your assets to meet your financial goals.

Your 20s: Emphasizing Growth

Retirement feels like a distant dream in your 20s, right? That distance is your greatest ally. You've got decades ahead, which means you can afford to take on more risk to maximize growth. At this stage, you might allocate 90% or more of your portfolio to stocks, with the remaining in bonds or cash.

Why so heavy on stocks? Simple - historically, stocks have outperformed other investments over the long haul. Sure, they're volatile and past performance is no guarantee of future results, but when you have decades to ride out the ups and downs, that volatility becomes less of a concern. And starting early lets you tap into the power of compounding - the secret sauce of wealth-building. In addition to your original investment, your gains begin to make money, too. And over time, the returns snowball.

Your 30s: Building on a Solid Foundation

Life has probably gotten more complicated by the time you hit your 30s. You may be buying a house, starting a family, or moving up in your career. You've got more responsibilities, but growth should still be your focus.

A portfolio for your 30s might still be 70% to 80% stocks, with 15% to 25% in bonds and a small percentage in cash. The increased bond allocation adds a layer of stability, which can be comforting as your financial obligations grow.

This decade is also the time to consider diversifying within your asset classes. Maybe you add some international stocks or split your bond investments between government and corporate bonds. Diversification helps spread your risk and increases your chances of earning consistent returns over time.

Your 40s: Shifting Toward Balance

In your 40s, retirement no longer feels like such a distant concept. You're beginning to see it on the horizon. This decade may be the time to strike a balance between growth and preservation. A typical portfolio in your 40s might consist of 60% to 70% stocks, 25% to 35% bonds, and 5% to 10% cash.

You're still pursuing growth but now layering in more protection. The slight shift toward bonds and cash reflects the growing need to preserve what you've accumulated. It's also an excellent time to reassess your financial goals. Are you on track for the retirement lifestyle you envisioned? Should you adjust your retirement age or savings goals?

Around this time, rebalancing becomes a serious consideration. As markets move, some assets will grow faster than others, and your portfolio could become unbalanced. Regular rebalancing ensures that your portfolio stays aligned with your target allocation and risk level.

Your 50s: Preparing for the Transition

As you enter your 50s, the homestretch is in sight. Retirement is no longer a far-off idea; it's right around the corner. For many at this age, asset allocation should focus on capital preservation (while still aiming for enough growth to last through retirement). A typical portfolio in your 50s might be 50% to 60% stocks, 35% to 40% bonds, and 5% to 10% cash.

At this stage, you're dialing down the risk. A significant market downturn could be tough to recover from, so lowering stock exposure is likely a smart move. But you can't eliminate risk entirely. People are living longer, and your portfolio still needs growth to outpace inflation and ensure your savings last (see longevity risk below).

Your 60s: Finalizing Your Retirement Portfolio

By your 60s, retirement is either happening or about to happen. The focus now shifts almost entirely to preserving your capital and generating income. A typical portfolio at this stage might consist of 40% to 50% stocks, 40% to 50% bonds, and 10% cash. Remember, "stocks" isn't a single category of risk. For example, some stocks offer lower risk and higher dividend payments.

At this point, your balance between stocks and bonds should reflect your retirement plans. For example, if you expect your savings to last for several decades, you might hold on to a slightly higher allocation of stocks.

It's also wise to have a cash cushion - enough cash or cash equivalents (like money market funds) to cover a few years of living expenses without being forced to sell investments during a down market. This buffer protects your portfolio from being depleted too quickly during tough times.

Beyond 70: Managing Longevity Risk

In your 70s, your focus shifts to managing longevity risk - the risk that you'll outlive your savings. A portfolio for this stage might include 30% to 40% stocks, 50% to 60% bonds, and 10% to 20% cash.

Bonds and income-generating investments are crucial at this stage for stability, but many retirees don't abandon stocks entirely. You may still need some growth to protect against inflation, which can erode your purchasing power over time.

Adjusting Your Portfolio Over Time

Your asset allocation isn't static - it should evolve with you. As your goals, risk tolerance, and time horizon change, so should your strategy. Regular reviews and adjustments keep your portfolio aligned with your financial objectives.

Rebalancing is key to keeping your portfolio in check. As markets fluctuate, some assets will grow faster than others, throwing your allocation off balance. Rebalancing brings it back in line, ensuring you stay on track.

Life changes - whether in employment, health, or family - can also impact your financial needs. Be ready to adjust your strategy as needed.

The Takeaway

Asset allocation is the cornerstone of any solid investment strategy. Whether you're just starting out in your 20s or managing wealth in your 70s, the right asset allocation is one that grows and evolves with you.

Making asset allocation decisions can be complex. If you need help, please get in touch with a financial professional for personalized advice.

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Active Versus Passive Investing

Is it worth paying higher fees to outperform the overall market? Let's explore two very different approaches to investing.
A stock market chart shown on a cell phone screen

There are two main approaches to investing: active and passive. While both strategies aim to grow wealth, they take very different paths to achieve that goal. Understanding how each works is key to deciding which method best suits your needs.

Let's break it down.

What Is Active Investing?

Active investing is all about hands-on management. It could involve an investor picking individual stocks or a team of analysts who study the market, make predictions, and adjust the composition of a mutual fund based on current trends or economic conditions. The goal is to "beat" the market, meaning to earn more than a standard benchmark, like the S&P 500 (an index of 500 large stocks).

This approach often involves market timing - buying and selling stocks frequently. Think of it like being on the field during a sports game. Active investors constantly adjust plays, reacting to what's happening in real time.

But with all that activity comes a cost. Actively managed funds usually charge higher fees because you pay for expertise and effort. And, despite the hard work, there's no guarantee that an active fund will outperform the market.

One of the big challenges active investors face is the difficulty of accurately predicting the market's movements. The stock market is influenced by many factors - economic data, corporate earnings, global events, and investor sentiment. Trying to predict these shifts in advance is tough, and even seasoned professionals don't always get it right.

What Is Passive Investing?

On the flip side, passive investing is more of a "set it and forget it" strategy. The goal here isn't to outperform the market - it's to match it. Instead of trying to pick winning stocks, passive investors often buy into index funds or exchange-traded funds (ETFs) that track a specific market index, like the S&P 500, Nasdaq, or the Dow Jones Industrial Average. This approach yields a naturally diversified basket of stocks across many different industries.

These funds aren't actively managed, which means they have lower fees. There's also less buying and selling, so you're not constantly triggering capital gains taxes. It's like putting your money on cruise control, letting it grow steadily over time without much interference.

While you won't beat the market with passive investing, you're less likely to lag behind it either. It's a long-term strategy designed to handle market ups and downs without too much emotional or financial stress.

The Cost Difference

When it comes to popular investing options like mutual and exchange-traded funds, one of the most significant differences between active and passive investing is cost. Actively managed funds tend to charge higher fees because of the research and management involved. You're paying for the expertise of a portfolio manager who's making decisions for you. There are also tax implications of frequent buying and selling, which will impact the overall results as well. Over time, these costs can eat into your returns.

Passive funds, by comparison, are much cheaper. Because they're simply tracking an index, they require less day-to-day management and there are fewer taxable events to impact overall cost. Lower fees mean more of your money stays invested and can grow over time.

Here's an example: let's say you invest $100,000 over 30 years. Say an actively managed fund charges an expense ratio of 1%, while a low-cost index fund charges just 0.1%. Both funds achieve an average annual return of 7% before fees.

Here's how your investment would grow in each scenario:

  • Actively Managed Fund - With a 1% fee, your net return is 6% per year. After 30 years, your $100,000 investment would grow to about $574,349.
  • Index Fund - With a 0.1% fee, your net return is 6.9% per year. After 30 years, your $100,000 investment would grow to about $761,226.

That's a difference of nearly $187,000 simply because the index fund has lower fees. Over time, even a slight difference in fees can significantly impact the overall growth of your investment.

What Does "Winning" Look Like in Investing?

In investing, the idea of "winning" can mean different things depending on your strategy. For some, winning means trying to outperform the market, aiming for returns that exceed standard benchmarks like the S&P 500. This is the goal of active investing - making strategic moves, timing the market, and picking stocks that are expected to deliver outsized gains.

But here's the catch: consistently beating the market is incredibly hard. Even professional fund managers, with all their experience and resources, struggle to do it year after year. In fact, studies show that the vast majority of actively managed funds underperform the market over the long term. According to the 2023 SPIVA U.S. Scorecard, only 7% of actively managed funds managed to beat the overall market over the past 15 years or so.

On the other hand, matching the market through passive investing can also be considered a win. By simply tracking an index, you benefit from the market's overall growth without having to predict its movements. You avoid the risks of picking the wrong stocks or mistiming trades. For many investors, this steady, lower-cost approach leads to solid returns over time, with less stress and fewer fees.

Remember, past performance isn't a guarantee of future results. So maybe, over the next 15 years, more actively managed funds will somehow consistently beat the overall market. But here's the key question: Is it worth chasing those elusive extra gains, or is it smarter to stick with the broader market's natural growth?

Which Approach Fits Your Style?

Choosing between active and passive investing really comes down to your personal goals and how much time you want to spend managing your investments.

If you like the idea of staying on top of market trends, analyzing companies, and potentially beating the market, active investing might be more your speed. Just keep in mind that even with a team of experts on your side, there's still a risk you won't get the returns you're hoping for.

On the other hand, passive investing could be the way to go if you prefer a lower-cost, low-maintenance option that grows with the market. You won't see the thrill of trying to beat the market, but you also won't face the heartache when a big bet doesn't pan out.

You also don't have to choose one or the other. Many investors use a mix of both strategies. You could put part of your money in actively managed funds or even buy and sell individual stocks yourself. Meanwhile, you could invest the rest in passive funds, letting that portion of your money march the market's overall growth over time.

This blended strategy may give you the best of both worlds: the chance to chase higher returns on one side while keeping things steady on the other.

The Bottom Line

There's no one-size-fits-all answer to choosing between active and passive investing. It depends on how much risk you're comfortable with, how much time you're willing to invest, and how much you're okay with paying in fees.

Active investing might sound appealing because it offers the potential for higher returns, but it comes with higher costs and more inherent risk. Passive investing isn't about beating the market but matching it with the lowest possible fees, so more of your money stays invested over time.

In the end, whether you go active, passive, or use a mix of both, the important thing is that your strategy fits your long-term goals. If you have questions about your investing approach, please discuss your situation with a qualified professional.

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Making the Most of Retirement Accounts

How to maximize the benefits of 401(k) and IRA accounts, including strategic account conversion options.
A smiling man meeting with a colleague.

What if you could boost your retirement savings by thousands just by knowing how to use your 401(k), IRA, or Roth IRA the right way? These accounts offer powerful ways to grow your money, but the real trick is figuring out how to get the most from each.

Let's break down what makes these accounts unique, how to use them strategically, and why a few smart moves now could pay off big later.

Understanding 401(k) Plans

Think of your 401(k) as a retirement savings powerhouse. It's an account where you can stash a portion of each paycheck into investments like stocks or mutual funds, and if you're lucky, your employer might throw in some extra money, too. That's free money - one of the biggest perks of a 401(k). If your employer offers a match, your top priority should be contributing enough to get the full match. After all, who wants to leave free money on the table?

Another great thing about a 401(k) is the tax benefit. When you contribute to a traditional 401(k), you're using pre-tax dollars. This means you're lowering your taxable income for the year, giving you an immediate tax break. For example, if you make $60,000 a year and contribute $5,000 to your 401(k), you'll only be taxed on $55,000. This feature is especially helpful if you're in a higher tax bracket today and expect to be in a lower one in retirement.

But here's the catch: since you're getting a tax break upfront, withdrawals in retirement are taxed as ordinary income. This fact might not be a big deal if you expect to be in a lower tax bracket, but if you think you'll be in a higher one, it could mean paying more in taxes later.

IRAs: Traditional and Roth

IRAs are another great way to save for retirement, and unlike 401(k)s, they're not tied to your employer. You can open one on your own, giving you more flexibility in what you invest in, whether stocks, bonds, or mutual funds.

A Traditional IRA works a lot like a 401(k). Contributions might be tax-deductible (depending on your income and whether you have a retirement plan at work), meaning you could lower your taxable income today and defer paying taxes until you take the money out in retirement.

A Roth IRA, on the other hand, flips the script. With a Roth, you don't get a tax break upfront because contributions are made with after-tax dollars. But the significant advantage comes later: your withdrawals in retirement are completely tax-free, as long as you meet certain conditions. That's a huge win if you expect to be in a higher tax bracket later or if you think tax rates in general will rise over time.

Plus, with a Roth IRA, there's no requirement to take money out during your lifetime, which is great if you want to let your savings grow for as long as possible or pass them on to heirs.

So, which one should you choose? It mostly depends on your current and future tax situation. If you're in a higher tax bracket now, the Traditional IRA might give you more bang for your buck. But if you expect your tax rate to go up in the future, a Roth IRA could save you more down the line.

Maximizing Contributions

Whether contributing to a 401(k), an IRA, or both, one of the best ways to maximize your retirement savings is by contributing as much as possible. For 2025, you can contribute up to $23,500 to a 401(k) if you're under 50, and if you're 50 or older, you can throw in an extra $7,500 as a catch-up contribution for a total of $31,000 (or up to $37,450 for those aged 60 - 63). For IRAs, the limit is $7,000 for those under 50 and $8,000 for those 50 and older.

Can't max out these accounts right now? No worries - small increases can make a big difference. Even boosting your contributions by just 1% each year can greatly impact your retirement nest egg over time.

Strategic Roth Conversions

Looking for a tax-free boost in retirement? That's where a Roth conversion comes in. This strategy involves converting funds from a Traditional IRA (or even a 401(k)) into a Roth IRA. You'll pay taxes on the amount you convert, but after that, the money grows tax-free, and future withdrawals are tax-free too.

Roth conversions can be especially strategic when your income is lower than usual, like early retirement before Social Security or pension benefits kick in. By converting a portion of your Traditional IRA to a Roth in these low-income years, you can manage your tax bill and set yourself up for tax-free income down the road.

Another reason to consider a Roth conversion? If you think tax rates will go up in the future, paying taxes now at today's lower rates might save you money in the long run. Plus, Roth IRAs are great for estate planning, as heirs can enjoy tax-free withdrawals from the account.

Note that a Roth conversion could increase your tax bracket and your eligibility for certain tax credits or deductions. Be sure to consult a tax professional before making a conversion.

Understanding Tax Diversification

Just like you diversify your investments to manage risk, it's wise to diversify your tax strategy. That means spreading your retirement savings across accounts with different tax treatments: taxable accounts (like brokerage accounts), tax-deferred accounts (like 401(k)s or Traditional IRAs), and tax-free accounts (like Roth IRAs).

Why? Because tax diversification gives you flexibility in retirement. Let's say you need extra income one year. If most of your savings are in tax-deferred accounts like a 401(k), pulling out more money could push you into a higher tax bracket. But if you also have a Roth IRA, you can take some tax-free withdrawals and keep your taxable income in check. Different types of accounts allow you to be more strategic about your withdrawals.

How to Optimize Contributions Across Accounts

For most people, the question isn't whether to contribute to a 401(k), IRA, or Roth - it's how to balance contributions across these accounts to get the best results. Here's a strategy to consider:

  • Employer Match First - Always contribute enough to your 401(k) to get the full employer match. It's free money, and there's no better return than that.
  • Max Out Your Roth IRA Next - If you're eligible for a Roth IRA, this should be your next consideration. The tax-free growth and withdrawals are tough to beat, especially if you expect to be in a higher tax bracket later.
  • Go Back to the 401(k) - Once you've secured the employer match and maxed out your Roth IRA, consider adding any additional savings into your 401(k) up to the maximum limit.
  • Consider a Taxable Account - A taxable brokerage account is a good option if you're maxing out your retirement accounts and still want to save more. While you won't get the tax benefits upfront, these accounts offer more flexibility for both withdrawals and investment choices.

Roth 401(k) Options

If your employer offers a Roth 401(k) option, you might want to consider it. A Roth 401(k) combines the high contribution limits of a traditional 401(k) with the tax-free withdrawal benefits of a Roth IRA. Contributions are made with after-tax dollars, so while there's no immediate tax break, withdrawals in retirement are tax-free.

For those who expect to be in a higher tax bracket in retirement or who want to hedge against potential tax increases, a Roth 401(k) can be an attractive option. Some people even split their contributions between a traditional 401(k) and a Roth 401(k) to have a mix of tax-deferred and tax-free income in retirement.

The Takeaway

A consistent savings plan is essential, but saving smart is where the magic happens. By making the most of your 401(k) match, considering Roth account options, and balancing your contributions across different accounts, you can make the most of every dollar saved for retirement.

Remember, if you're unsure about your next move, don't hesitate to seek professional advice.

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Target Date Mutual Funds

Is a "set and forget" retirement savings plan right for you? Let's explore the pros and cons of this popular option.
A couple on the beach at sunset.

Imagine a single investment that automatically adjusts its risk level as you get closer to retirement. That's the basic idea behind target date funds, one of the most popular options among those saving for retirement. In fact, target date funds are the default option of many employer-sponsored retirement savings plans.

But are they the right fit for your retirement strategy?

What Are Target Date Funds?

Target date funds, often referred to as lifecycle funds, are mutual funds tied to a specific year in the future - your retirement year. So, if you plan to retire around 2050, you might choose a "Target Date 2050" fund.

The key feature of these funds is their glide path - a strategy that gradually shifts the fund's allocation over time.

Early on, when you're younger and have time on your side, these funds lean heavily into stocks, aiming for maximum asset growth. But as the years pass and you get closer to that target date, the fund automatically transitions toward a more conservative mix, moving into bonds and cash equivalents to protect your nest egg from market swings.

For example, a Target Date 2050 fund might start with 90% stocks and 10% bonds. By 2050, that allocation could shift to something like 40% stocks, 50% bonds, and 10% cash equivalents. The idea is that the fund does all the hard work for you, rebalancing your portfolio automatically as you age.

This automatic rebalancing is one of the biggest selling points of target date funds - buy it and forget about it until retirement. With professional management baked in, target date funds offer a solution that may be ideal for novice investors or those looking for a hands-off investing option.

But simplicity isn't the only thing that matters. And there can also be significant differences between funds with the same target date.

Understanding the Fund's Glide Path

It's essential to understand how the glide path of a target date fund works. Some target date funds aim to hit their most conservative point by your retirement date - these are called "to retirement" funds. Once the date arrives, they stop adjusting their asset mix. On the other hand, "through retirement" funds continue to evolve after you retire, gradually reducing risk for several more years.

Why does this matter?

If you plan to leave your money invested after retirement, which many people do, you'll want to understand how much risk your fund is still taking even after you stop working. A "through retirement" fund might give you a smoother landing, but it could also expose you to risk longer than you'd like since a portion of your savings continues to be invested in stocks (and exposed to stock market fluctuations).

One Size Doesn't Fit All

Here's where it gets tricky. Target date funds take a one-size-fits-all approach based solely on your expected retirement year. They don't consider your risk tolerance, financial situation, or specific retirement goals.

Two people planning to retire in 2050 might have very different financial pictures. One might have a pension and be comfortable with more risk, while the other may rely solely on personal savings and prefer a more conservative approach. A Target Date 2050 fund would treat both investors the same way, which may not always be ideal.

Another factor to consider is that target date funds don't protect against sequence of returns risk. This is the risk of withdrawing money during a market downturn early in retirement, which can negatively impact your retirement income. Even with a more conservative allocation near retirement, target date funds don't fully eliminate this risk - they can reduce it but can't erase it.

For those concerned about a market downturn as retirement approaches, one strategy is to divide your savings into different "buckets" based on when you'll need the money. For example, one bucket could be for the first five years of retirement and include investments protected from market swings. Another bucket could be for years six through ten, which may offer some stock exposure, and so on.

Again, with target date funds, all your money is in the same bucket, regardless of your personal risk preferences.

What's Inside: The Underlying Investments

One aspect that often goes unnoticed is what's inside the target date fund - specifically, the underlying investments. When you buy a target date fund, you're not just buying one fund - you're purchasing a collection of other investments. The underlying funds might be a mix of actively managed mutual funds or low-cost index funds. And this is where things can get interesting.

Some target date funds invest in proprietary mutual funds created and managed by the same company offering the target date fund. These proprietary funds might carry higher fees versus low-cost index funds. For example, some funds use actively managed strategies, which tend to come with higher costs but aim to outperform the market. Others may take a passive approach, using index funds to keep expenses low while aiming to match market returns.

The target date fund's investment philosophy also plays a big role. Some companies take a more aggressive approach, keeping a higher stock allocation even as the target date nears, while others might be more conservative. These differences mean two funds with the same target date could have very different risk profiles.

When considering a target date fund, it's crucial to look beyond the target date. Examine the fund's glide path, the underlying investments, and the fees associated with the fund. If a fund invests in high-cost, actively managed mutual funds, you may be paying more in fees but not getting much more in terms of performance.

The Fees: What Are You Really Paying?

Speaking of costs, let's dig a little deeper. One of the main downsides of target date funds is the expense ratio - the annual fee you pay for management. While target date funds offer convenience, that convenience isn't always cheap.

For example, a fund with an expense ratio of 1% compared to one with an expense ratio of 0.1% can lead to a very significant difference in your final account balance over 30 or 40 years. And when you combine the fees from the target date fund and its underlying funds, the total cost can climb even higher.

So, while target date funds offer simplicity, make sure the fees you're paying are worth it for the value you're getting. Since you're paying for convenience and professional management, make sure the fund's fees and investment approach align with your investment goals.

Are There Alternatives?

If you decide that a target date fund isn't the right fit for you, there are alternatives. One approach is to build your own diversified portfolio using low-cost index funds. This approach gives you more control over your asset allocation. It allows you to adjust your portfolio based on your personal circumstances, not just your age.

Another option is a balanced fund, which holds a fixed mix of stocks and bonds. However, you'd need to manually shift to more conservative investments as your risk tolerance changes as you approach retirement.

Working with a financial advisor is another alternative, especially if you want a more personalized strategy. While this typically comes with higher costs, a tailored plan can align more closely with your financial situation, risk tolerance, and specific goals. You can help mitigate those costs by working with an advisor paid on an hourly basis versus an annual percentage of your assets.

The Bottom Line

Target date funds offer a convenient, hands-off way to save for retirement, providing professional management, automatic rebalancing, and built-in diversification. But they're not perfect for everyone. The one-size-fits-all approach may not match your personal risk tolerance or financial goals, and the underlying investments and fees can vary significantly between providers.

Before choosing a target date fund, examine its glide path, underlying investment strategies, and fees. If simplicity and automatic adjustments appeal to you, a target date fund could be a great fit. But if you want more control over your portfolio or a more personalized approach, you may want to explore other options.

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How Investment Fees Affect Returns

Seemingly small fees can have an unexpected impact on your total savings over time.
An image illustrating investment growth with several stacks of money.

When planning for retirement, most people focus on how much they save and what kind of returns their investments generate. But there's another factor quietly draining your savings that doesn't get as much attention: investment fees. These seemingly small costs can take a big bite out of your long-term wealth if you're not careful.

Think of investment fees as a slow leak in your retirement savings bucket. At first, they might not seem like a big deal. But over time, they can drain a significant amount, especially when you consider the power of compounding. Just as compounding helps your investments grow, it also amplifies the impact of fees, chipping away your returns.

Let's break it down with an example. Imagine you invest $100,000 for 30 years, earning an average annual return of 7%. If you pay 0.5% in fees, your investment grows to about $574,349. But if your fees are 1.5%, your investment only grows to about $432,194. That's a difference of $142,155 - money that could have boosted your retirement lifestyle. Even a 1% difference in fees could cost you nearly a quarter of your potential retirement savings.

So, where are these fees hiding, and what can you do about them?

Breaking Down Investment Fees

Investment fees come in various forms, and knowing what to look for is the first step in managing them. Here's a rundown of the most common fees:

  • Expense Ratios - These are the annual fees charged by mutual funds and ETFs to cover the cost of managing the fund. They're expressed as a percentage of your investment and automatically deducted from your returns.
  • Advisory Fees - If you work with a financial advisor, they usually charge a fee for managing your investments on top of fees that may be changed for underlying investments. This fee is typically an annual percentage of your portfolio's value (though some advisors charge an hourly rate instead).
  • Account Maintenance Fees - Some investment accounts charge fees just for maintaining the account. These can add up, so it's worth checking if these fees apply to your account(s).
  • Load Fees - Some mutual funds charge a sales fee, or "load," when you buy or sell shares. This fee can be front-end (charged when you buy) or back-end (charged when you sell).

While fees might seem small initially, they compound over time, just like your investments. But instead of helping your money grow, fees reduce the amount you have invested, which means less money compounding year after year. As we learned in the example above, these fees can make a big difference over time.

Inflation and Fees: The Hidden Connection

It's important to remember that fees reduce your real (inflation-adjusted) returns. If inflation is 2% per year and your fund charges 1.5% in fees, you'll need to earn at least 3.5% just to break even in real terms. That's why keeping fees low is especially important when inflation is a concern -higher fees make it harder to achieve inflation-beating returns.

Note that inflation rates vary over time, and this example is hypothetical since it's impossible to predict future inflation. But considering inflation along with fees is another way to understand how fees impact returns, even without an extended time horizon.

The Value of "No-Load" Funds

When exploring mutual fund options, you might come across "no-load" funds. These are a popular choice for fee-conscious investors because they don't charge a sales fee when you buy or sell shares. This cost difference means you can invest (and rebalance your portfolio) without worrying about front-end or back-end load fees eating into your returns. Many low-cost index funds and ETFs fall into this category, making them attractive for long-term investors looking to minimize costs.

While no-load funds do not charge sales fees, they may still have other fees, including expense ratios. Review a fund's prospectus to understand the entire fee structure.

Strategies to Minimize Fees

Now that you understand where fees come from, here are some strategies to help you minimize them and keep more of your money working for you:

  • Consider Low-Cost Index Funds - These typically have much lower expense ratios than actively managed funds. For example, many index funds have expense ratios below 0.1%, while actively managed funds might charge 1% or more.
  • Understand Your Advisor's Fees - If you work with a financial advisor, understand how they charge for their services. Some charge a flat or hourly fee, while others charge a percentage of your assets. Knowing what you're paying for helps you assess the value of the service.
  • Review Your Accounts Regularly - Keep an eye on your investment accounts to understand each and every fee. Some fees can be avoided or negotiated, so it's always worth checking.
  • Watch for Opaque Fees - Some investments, like certain annuities or similar products, can have complex fee structures. Make sure you understand all the costs involved before committing to an investment.

Investment fees aren't always as straightforward as they should be. Taking the time to read the fine print means you know exactly what you're paying and what you're getting in return.

Balancing Fees with Value

While minimizing fees is essential, it shouldn't be your only consideration. The goal is to balance cost with value. For instance, a fund with slightly higher fees might be worth it if it consistently outperforms its benchmark. Likewise, paying for professional advice can help you stay disciplined with long-term planning or navigating complex financial situations, which might save you more than the cost of the advice itself.

Before you invest in a mutual fund or ETF, it's a good idea to compare the fees of similar funds. For example, two funds might track the same index but have different expense ratios. Even a 0.5% difference in fees may not seem like much at first, but over decades, that small gap can add up to thousands of dollars in lost savings.

The Takeaway

Every dollar saved in fees stays in your account, growing and compounding over time. By paying attention to investment fees, you're taking an important step toward maximizing your retirement savings.

Being fee-conscious doesn't necessarily mean sacrificing quality - it means making sure more of your hard-earned money works for you.

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