How should I balance discretionary investments with retirement investments?
As a recent college graduate at 22 years old, how should my investments be split between investments not for retirement, and those for retirement? I earn enough money to max out my employer's 401(k) match and Roth IRA.
Wow! Fantastic questions to hear from a 22 year old. Too few young people realize how critically important it is to start saving and avoid debt early in your career. As for your question, lets prioritize your action steps.
1. Establish a small emergency fund (lets say 1-2 months rent and basic expenses). Leave it in cash / cash equivalents.
2. Contribute up to your employers matching level in 401k. Use Roth option if available, unless you are in 25% tax bracket or higher, in which case I would use pre-tax funds.
3. Aggressively payoff non-mortgage debts including student loans
4. Beef up the emergency fund to 3-6 months worth of expenses. High end of this range if your income is at risk, low end if if employment is stable. Dont touch these funds except for a true financial emergency, and replenish as quickly as possible (put other steps on hold) if they are depleted.
5. Increase retirement contributions to 15% of income. Fill up company match, then max Roth IRA if you qualify, then back to the employer plan. You can invest these funds aggressively for growth.
6. Accumulate assets toward medium term goals such as buying a home. If the goal is more than 5 years off, you may choose to invest the funds using a moderate allocation fund. Otherwise, stick to cash or short term instruments like CD's, short term bonds, etc.
7. Accumulate wealth outside retirement accounts for long term goals (retirement, college for kids, etc.).
You can pursue # 5 and # 6 simulaneously. Otherwise, I would encourage you to fully implement each step before moving on to the next one.
I hope you find this guidance useful.
You are on the right track already by contributing the maximum 5500 to your Roth IRA and the maximum matched amount to your 401(k). You can contribute additional money into your 401(k) which is not matched, including possible after-tax money, up to 25% of your salary. Definitely do that if you can afford it--it sounds like you have little or no student loan debt which is excellent. If you are married you can put another 5500 into a Roth IRA for your spouse, even if he/she is not working. If you have money left over after all of that, which would be amazing, then put it into a regular brokerage account and make investments which you hold for at least one year and one day so the capital gains and dividends are taxed at the lowest rate--0% up to around 60/70 thousand in income and 15% afterward, unless you get promoted really fast in which case it could reach 18.8% or 23.8% for long-term capital gains and qualified dividends.
I would be very conservative now with your investments. Don't buy U.S. equities or anything trendy with these near all-time highs; stick with whatever is unpopular. If you lose half your money from taking risks then it may discourage you from prudently taking risks later on when prices are much lower. Once all your co-workers are afraid to buy stocks, gradually accumulate them.
First piece of advice would be to look into your employer 401(k) plan and be sure you understand the fees that are attached to it. Often times these plans can be very expensive and not ideal to invest in. Along with the potentially high fees associated with the fees, your investment options are very limited. My advice would be to max out a traditional IRA and a Roth IRA before investing in an individual account. Always take full advantage of tax protected accounts. Possible even lose the 401(k) if the fees are too high.
If you have an extra discretionary income after monthly expenses are paid, I recommend that you increase your retirement savings in your firm 401k plan up to the annual limit of $18,000.
Not sure what you mean by discretionary investments. If you are talking about investments earmarked to purchase a home, buying a car finance a graduate degree or a wedding, then you should approach them the same way as your retirement savings. However, since their timing of these investments is much sooner, you probably want to be a little more conservative as you don't want to put your earmarked savings at risk
You have the right outlook. I would max the 401(k) match and the Roth IRA then invest the rest in an Individual taxable account for extra diversity or shorter term goals. I recommend you open a Roth IRA and Individual account with a low-cost ETF portfolio.