7 Signs You're Ready To Start Investing Beyond Your 401(k)
A workplace 401(k) can be one of the easiest places to start investing for retirement, particularly if an employer matches some of your contributions. Of course, as one's finances become more stable and goals change or expand, there may come a point when keeping all investment dollars inside a workplace plan no longer makes sense.
The key is making sure the rest of the financial foundation is strong first. Here are seven signs you may be ready to start investing beyond your 401(k), according to financial experts.
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1. You’re Getting Your Full Employer Match
Before directing additional investment dollars elsewhere, you should be contributing enough to your 401(k) to capture the full employer match. Matthew Dicken, founder and CEO of Strategic Wealth Designers, called the match “free money and included in your total compensation, so you do not want to leave money on the table, as they say.”
You don’t necessarily have to max out the entire 401(k) before investing elsewhere. However, getting the full employer match is a good benchmark, particularly when you have other financial goals that require accessible money.
2. You Have a Solid Emergency Fund
Investing more aggressively becomes easier when an unexpected expense doesn’t force you to sell investments or take on debt. The right emergency fund varies by household, but Erica Sandberg, consumer finance expert at BadCredit.org, follows the industry standard advice of having a minimum of three months worth of expenses saved (but ideally six to 12 months worth in an emergency account).
“That will be enough to get you through most of life’s emergencies, just not all of them.”
However, having any emergency fund is better than none.
3. Your High-Interest Debt Is Under Control
Extra investing may not be an ideal priority when you’re carrying expensive debt. Dicken said investors should assess which debts to pay off by how high the interest rate is, and how long you have to pay it. “However, most of the time you do not want to invest additional money outside of you 401(k) if you have debt that will soon be due or has a high interest rate usually defined by being higher than 10%,” he noted.
4. You Still Have Money Left Over Each Month
Another straightforward readiness signal is positive monthly cash flow after paying bills, funding your emergency savings and addressing expensive debt. At that point, Dicken suggested adding an IRA or Roth IRA, so long as you’re taking advantage of an employer match in your 401(k).
Brianna Rodgers, director of investor education at Madison Trust Company, also recommended looking at outstanding debt, emergency savings and short- and long-term financial goals before deciding whether you’re ready for another retirement account.
5. You Have Financial Goals Beyond Traditional Retirement
A 401(k) is designed primarily for retirement, but your money may need to accomplish other goals before then. In that case, a taxable brokerage account could become useful, Dicken said.
“We think of retirement accounts and taxable accounts as doing different jobs," he further explained. "Retirement accounts can be valuable because of their tax advantages. A taxable account can be valuable because of its accessibility.”
For instance, retiring before age 59½, building capital to start or buy a business, purchasing a vacation home, funding major family expenses or building long-term wealth outside a retirement account are all good reasons to have a taxable brokerage account.
6. You Want Investments Your 401(k) Doesn’t Offer
Workplace retirement plans generally offer a limited investment menu. Investors who understand the additional risks and responsibilities involved may eventually want access to assets that aren't typically available through their 401(k).
Rodgers pointed to alternatives including real estate, cryptocurrency, precious metals and private businesses, which could all be held through a self-directed IRA. Though, keep in mind that some of these private investments may have holding periods, transfer restrictions or limited liquidity.
“Before opening or contributing to another account, investors can consider what their savings goals are, and at what point they may need to access those funds,” she said.
7. You Have a Clear Plan for What Extra Investments Should Do
Being able to invest more doesn't automatically mean you should. Before opening another account, identify the purpose of the money, when you’ll need it and how the new investments fit with the rest of your portfolio.
Dicken warned against chasing trending or hot stocks, trading too frequently or taking on risks investors don’t fully understand.
Before investing, Dicken said to ask questions like, “Should I instead invest the money into furthering my education, being charitable [or] taking a vacation?”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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