Smart Investment Moves for Mid-Career Professionals

As you are getting established in your career, you may experience a mental tug-of-war between focusing on the present or the future.  As you balance short-term and long-term goals there are specific actions you can take that can jumpstart the building of wealth.

You may find yourself wondering what steps you can take now so that when you want to buy a house, you’ll be able to finance it at the best possible rate.  You’re wondering how to save for college for your kids or pay off your student loans, or whether it’s the appropriate time to seriously save for retirement.

All of these are major financial decisions which can lead to stress.  It may seem daunting to try to balance short-term, medium-term, and long-term objectives at the same time, but it can be done.  We’ll take a look at how to approach some of the major financial decisions you’ll face over each of those time horizons to perhaps ease some of the stress.

 

Purchasing a House 

A house is usually the biggest purchase that an individual makes during their lifetime.  Very few people can afford to pay cash for a house, so most people end up taking out a mortgage.  When you’re talking about borrowing such a large sum of money to make a major purchase, it’s important that you’re set up to get the best interest rate possible.  While there are many factors that go into the rate that you will be offered, one thing holds true—the greater your credit risk, the higher the interest rate you’ll be offered.  Let’s examine a few of the ways to help get the lowest rate possible so that you minimize the amount you’re paying in interest.

One of the biggest drivers of the rate that you’re offered for a mortgage is your credit score.  The higher your credit score, the lower your interest rate will be.  Therefore, it’s important to know what factors influence your credit score.  These factors include payment history (paying bills on time), amounts owed (how much you are already borrowing), length of credit history (the longer you’ve had accounts open, the better), new credit (opening several accounts in a short period of time represents a greater risk), and credit mix.  By making payments on time, not owing a lot of money, and having accounts that have been open for a long time, you can increase your chances of being offered a better mortgage rate.

Once you’ve done everything you can to ensure that you can receive the best rate, the next major step is finding a lender.  Never has it been truer that you shouldn’t just take the first offer you’re given.  This is the time to cast a wide net because you’ll find that offers will vary significantly.  A big bank won’t necessarily be the best place to get the lowest mortgage rate.  You should contact several different lenders—local credit unions, traditional banks, and online mortgage companies.  Increasingly, the best rates are found online but you should compare your choices and consider your personal situation.

Most people are aware that the shorter the term of the mortgage, the lower the mortgage rate.  The two most common fixed-rate mortgages are for 15 and 30 years, with the 15-year mortgage having a higher monthly payment (albeit with a lower interest rate).  Regardless of what type of mortgage you get, there are other factors that will affect the rate offered.  If you make a down payment of less than 20% of the purchase price of the house, you will have to buy private mortgage insurance (PMI) which will increase your monthly payment.  While this might be an option if you don’t have the money now for a significant down payment but expect your cash flow to be significant going forward, it does result in a much higher monthly mortgage payment.  If what you’re looking for is the lowest possible monthly payment, and you’re able to put down more than 20%, many lenders will offer you a lower rate because they see you as less of a risk.

Funding Children’s Education

Other than buying a house, paying for college for children can be one of the biggest financial stressors for parents.  Fortunately, there are ways for you to invest in your children’s education while also avoiding some of the tax consequences that usually come with investments.

A 529 savings plan is a tax-advantaged plan that can be used for education savings.  A 529 account works much like a Roth IRA by investing your after-tax contributions into investment portfolios like a mutual fund.  529s are also very flexible, allowing you to use your savings at in-state, out-of-state, public, or private schools.  Earnings grow free from state and federal taxes and are never taxed when used for qualified higher education expenses.  If your plans change, or your student earns a scholarship, you can withdraw your original investment, although you may be subject to taxes or penalties on investment earnings.

Each state sponsors a 529 plan, but you don’t have to invest in your own state’s plan.  However, many states offer residents a state tax deduction for doing so, so there are potential tax benefits that you can receive by investing in your own state’s plan.  It’s worth checking to see if your state offers a tax benefit and to determine which state’s plan you’re most comfortable with and offers a reasonable investment return.

So how much can you contribute to a 529 plan?  Gifters can contribute up to $18,000 in 2024 to a 529 account per person, per year with no gift tax ramifications.  A married couple could give up to $36,000 per account, per year in 2024 without having to pay a gift tax or erode their lifetime gift tax exclusion.  In 2024 you can front-load a 529 plan (giving 5 years’ worth of annual gifts of up to $18,000 at once for a total of $90,000 per person, per beneficiary) without having to pay a gift tax or chip away at the lifetime gift tax exclusion.  If you (or a family member) have the ability to begin funding a 529 plan early, you can make great strides in setting yourself up to pay for college when the time comes.

What happens if your child is fortunate enough to receive scholarships and you don’t end up using all of the money in a 529 plan?  Starting in 2024, you can roll unused 529 assets—up to a lifetime limit of $35,000—into the account beneficiary’s Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income.  You need to have owned the 529 for at least 15 years before you can execute a rollover. Contributions made to the 529 plan in the last five years before distributions start—including the associated earnings—are ineligible for a tax-free rollover.

Maximizing Retirement Contributions 

Retirement may seem a long way off, but that means now is the perfect time to begin saving and investing for it.  In fact, the more you’re able to do when you’re young, the more time the power of compounding will work for you, helping to relieve anxiety when you’re actually approaching retirement age.  The best way to set yourself up for financial freedom in retirement is by maximizing your retirement contributions when you’re young.

A 401(k) is a tax-advantaged retirement savings plan that an employer sets up and manages.  There are two key advantages to a 401(k) plan—higher contribution limits than for a traditional Individual Retirement Account (IRA) and the employer match.  We’ll discuss the contribution limits first and then focus on the employer match.

The 401(k) contribution limit for 2024 is $23,000 for employee contributions, and $69,000 for the combined employee and employer contributions.  This far exceeds the limit on annual contributions to an IRA, which is only $7,000 (up from $6,500 in 2023).  If you max out your employee contributions in a 401(k) plan, you’re well on your way to meeting your retirement goals.

The employer match is one of the biggest advantage to a 401(k).  It allows you to accrue retirement savings at a faster rate than you could achieve on your own.  So, what exactly is a 401(k)-employer match?  For many employers, if you contribute a specific percentage of your income into your employer’s 401(k) plan, they will match that contribution.  Typically, the employer’s contribution is 3-6% percent of your income. Many employer match programs are capped at 6%.  This money will be given to you at no extra cost.

It varies from company to company, but you should always be aware of your company’s matching rate. If your employer agrees to match your contribution at 50%, that means if you contribute 6% of your income, they will match 3% annually.  That is free money they are offering you.  Even if you’re not able to contribute the annual maximum amount to a 401(k), you should at least invest the maximum amount that your company will match in order to get the most out of employer’s match program. 

How to Get Started

Any time you’re facing a mountain of financial decisions, it’s important to have someone who can help you cut through the jungle of information and options and set up a clear path.  By working with a professional financial adviser, they can help keep track of your financial situation and give you clear, objective advice to ensure that your financial goals are met.  Find someone that you’re comfortable with and let them help guide you on your financial journey. 

 

About Chase Investment Counsel

Chase Investment Counsel is a family and employee-owned boutique wealth management firm that offers personalized investment services. Our clients include career professionals, those nearing or in retirement, and families experiencing financial transitions such as generational wealth transfer, widowhood, divorce, or sale of a business. Chase’s active, disciplined investment management team is focused on selecting individual stocks and bonds targeted to each investor’s specific financial goals and risk tolerance. Established in 1957 in Charlottesville, VA, Chase Investment Counsel manages more than $400 million in assets.