People of different ages make investments for different reasons.

During your working years, your goals are to build up your 401k or IRA account and your after-tax account, as has been described in previous Investors Columns (available online).

To best accomplish that, any time you leave a company, transfer your money from their 401k to an IRA.  The options offered for a company 401k are generally conservative – appropriate for the average person who knows nothing about investing.  But a serious investor can do much better in an IRA, where he can directly invest in stocks, rather than be limited to mutual funds with only moderate performance.

Throughout your career, your primary goal is to build up your 401k or IRA investment amounts as much as possible.  You should begin by putting away money into a 401k or IRA at the rate of 6% of each paycheck, the maximum rate that companies will contribute a matching deposit.

But with each loan paid off, and with each raise, the percent deposited in a 401k or IRA should be increased.  The goal is to be depositing the maximum allowed by the IRS, 15%.  

In addition to that, you should also be making regular cash deposits into an after-tax investment account at a discount brokerage, as often and as much as you can afford.  Use this money to begin your pursuit of learning how to be a successful investor:  researching, evaluating, and buying and selling stocks.  In this account, your goal is to achieve an average annual growth in your investments of better than 12 percent.  

But once you retire, not only do the contributions to your 401k or IRA stop, but past a certain age (72 ½ at this time) the IRS requires that you begin withdrawals – i.e., moving money and investments from your 401k and IRA into the after-tax account.

The goal, of course, is for your investments to grow enough to be able to avoid reducing the total amount of your investments.  In years like 2022 (to date, at least), a recession results in a decline of your portfolio’s value even without any withdrawals.  In years of economic improvement, your investments must make up for losses occurring in the year(s) of a downturn.

Maintaining the value of your investments also becomes more difficult for the (quickly increasing) portion of your investments in an after-tax account, because taxes will be due (1) on any amounts moved from your IRA to your after-tax account, and (2) anytime you sell stocks in your after-tax account for more than you paid for them (i.e., any capital gains).  

Selling stock during a downturn is to be avoided, of course.  So you have to begin to sell stocks during the periods of greatest economic upturns, to maintain a pool of ready cash for living expenses, even in a downturn.  

Selling when stock prices are high means you need to sell fewer shares to reap a given amount of money, versus selling more shares during a downturn to get the same amount of cash.  

Just as important, those extra shares that you retain can make a big difference later, after the downturn, when economic growth returns.  The greater number of shares can help multiply the rate of your investment portfolio’s recovery and new growth.

Juggling all those variables – shares of stock sales and purchases, paying taxes, and judging the state of the economy and its general trend-line for the next year or more – becomes more crucial after retirement.  Careful investment management is required.  Take advantage of the free time you have as a retiree to do the necessary research.  Your decades of investment experience can make the difference to your ongoing success as an investor.

A person’s goals change with age.  The biggest change is retirement – a time when you switch from a job, regular income, and adding to your savings, to managing the withdrawal of that savings to support and maintain your lifestyle – for the rest of your life.

Scott Crosby
scott@scottschoice.com
www.scottschoice.com■