What's the best thing to do with excess wealth at age 30?
I have excess funds and am unsure what to do with them I'm 30 years old with a stable job and single. I've already contributed to reach my company match on my 401(k) and maxed out my Roth IRA contributions. I have already set aside 1 year of emergency funds. Now I still have excess savings, and I'm unsure of what to do with the money. First world problem (I know), but what do you recommend to help grow my wealth?
It's a wonderful problem to have, isn't it?
A few general ideas come to mind but you really need the services of a personal financial planner and advsior to help you and work closely with your tax pro (having to have a financial advisor is a first world problem, too, but you have it).
You might ask your employer if they would defer some of your compensation. This would at least put off the tax burden on these funds for several years.
I'm generally not sanguine about using annuities, as they tend to be expensive and tipped to benefit the insurance company far more than the client, but there are some new fee-only annuities you might consider using for tax deferrment strategies. Annuities have no tax benefit to contribute, but the funds will grow tax-deferred. You are in a unique situation where using an annuity to shelter investment growth from taxes may make sense.
Also, you're going to need an advisor who works closely with your tax professional to manage your investments in tax-sensitive ways. Buying and holding individual stocks instead of funds, using municipal bonds instead of corporate or federal bonds, harvesting tax losses regularly, etc.
Feel free to reach out to a few of us if you want more personalized advice. We're kind of limited in what we can advise you to do on a public forum.
All my best!
Head to Atlantic City! J/K... First off congrats on doing the max to the 401(k) and the Roth IRA as you are already well on your way. If your company 401(k) allows for after tax dollars I really like the idea of contributing as much as possible there and then converting to a Roth in addition each year. Assuming they do not have that ability I would open up a liquid investment account and contribute on a monthly basis. Start with whatever you are comfortable with whether that be $100/mo or $3,000. Then it becomes simple to increase as your income and ability allow. At your age if you keep that up and contributing as such you'll be in a fantastic position down the road. No need to over complicate it from there.
Congrats on doing such a good job with your retirement savings. You mentioned you are contributing enough to reach your company match, but didn't indicate that you had maxed out your 401(k) contributions ($18,500 for you in 2018). As you know these funds will not be accessible to you until you are at least 59 1/2, but if you really want to grow wealth then you should be contributing more to the 401(k). After you max out the 401(k) and you still have excess funds for investment, then you should start considering taxable investment accounts. As a fellow millennial, I understand that time is on our side, and therefore risk is on our side. If you want to save money for a house or other large purchase that's certainly fine, and you should not take excessive risk in those accounts. But if you're saving for retirement then throw the hammer down and see what the market gives you. At this point it's more important to focus on contributing as much as you can, and reducing your fee drag as much as you can.
Good luck to you!
First, I want to congratulate you on contributing as much as possible to your retirement plans at a relatively young age. This is something we always recommend, but many lack the discipline to do. One year of emergency funds is a great cushion! We typically recommend at least 6 months, but this should be based on a number of factors including the cost of living in your area, your expenses and comfort level.
As you mention, excess savings is a great problem to have. Now that you have hit all the basics, you need to figure out your objectives for this excess money. Will you need to access this cash to buy a house with in a few years, or are you looking for longer-term growth and may not need this money for 20 to 30 years? Basically, the most important piece to determine how to invest is your timeframe. If you have a long-term time horizon, you may want to take on more risk with the potential for stronger average returns, but if you have a shorter horizon, you should consider having less risk, which generally means giving up some of those potentially better returns.
Figuring out your time frame is easiest by sitting down with a fee-based wealth advisor, but there is, of course, a fee associated with having access to more personalized advice. If you want to figure out an asset allocation on your own, the general rule of thumb is that longer-term means you can take more risk, which means more equities and less bonds in your portfolio. If your time frame is shorter, then you would want more bonds and less equities. You should also consider the fees associated with any investments you want to make. To have a better understanding of the investment fees you are paying, read: Mutual Fund Fees: How To Know What You’re Paying For.
After you determine your allocation, open an individual or joint account at a custodian of your choice. Schwab, Fidelity, TD Ameritrade all have strong reputations, and you can invest in many options there. If you are doing this yourself, it is likely easiest to buy a few index funds that will give you the desired level of equity and bond exposure. If you would rather not navigate this yourself, a financial advisor can coordinate all of this for you!
Having excess wealth at age 30 or any age is a problem most people would love to have. For someone your age I would think a long term growth strategy would be beneficial. And depending on the size of your retirement accounts you may want to allocate a small percent of your investments in alternative investments.
Some alternative investments require accredited status and you may give up liquidity but the long term returns outperform the old standard asset allocation mix of stocks, bonds and cash.
This model of investing is referred to as the Yale University Endowment Model. In 1987, David Swensen, the chief investment officer of Yale Endowment, moved aggressively into non-traditional and often illiquid asset classes like foreign equity, absolute return, real assets, real estate partnerships and private equity.
His unconventional approach produced a 20-year unbroken record of positive returns, resulting in stellar growth of the endowment from $1b to $17b. No wonder rival school Harvard University studied him closely. Other institutional money managers have followed his strategy.
Yale’s six asset classes are defined by their different expected response to economic conditions, such as inflation, growth and interest rate. As these asset classes are noncorrelated to the stock or bond market and over time during bear markets potentially producing better long term returns versus investing only in stock and bonds.