5 smart investing moves to make before you turn 35

If you’re getting into your 30’s and still haven’t started investing much, you aren’t as far behind as you think. Around 61% of adults don’t start saving for retirement until their 30’s

The promising news is that if you start saving in your early 30s, you still have roughly 30 years to build your retirement savings. If you wait longer than that until your late 30’s or 40’s, you’ll have to save much more aggressively each month to reach a comfortable amount for retirement. 

If you’re reading this and you’re older than 35, you can still save enough to retire but you want to start immediately. 

For anyone that’s getting started investing or deciding to dedicate more time and energy to start building their investments, there’s some basic financial boxes everyone needs to check regardless of your age. 

Here are 5 investing moves to make before you’re 35:

1. Make the most of your 401(k)

If you have a 401(k), you are an investor and this is a great place to start to ensure that you are setting yourself  up for success.

There are a few ways to optimize your 401(k), including reducing the fees you are paying on the account. The average American will spend $138,000 in fees which can increase your retirement age by a few years!

To reduce those fees, I recommend learning how to invest in index funds. Index funds have lower expense ratios (fees) and allow you to keep more of your money. They also often perform just as good or better than funds actively managed by money managers.

Another way to reduce fees to rollover old 401(k)’s. If you’re investing in your 30’s, you likely have at least one old 401(k). Leaving this account with your former employer will cause you to pay administrative fees that you can easily get rid of by rolling over the account. There are free services like Capitalize that will help you rollover your old 401(k)’s quickly and easily. 

Learning how to make the most of your 401(k) can help you protect your 401(k), even in a recession.

2. Add a Roth IRA

A Roth IRA is an investment vehicle that you can use to grow your wealth tax free and get tax free withdrawals in retirement. 

While there isn’t any tax benefit when you contribute your money, once it’s in there it grows tax free, meaning that you don’t have to pay taxes on capital gains and you won’t be taxed when you take your money out once you’re over 59 ½. 

You can open a Roth IRA on your own without an employer through any bank, brokerage, mutual fund or insurance company, and you can invest your retirement money in stocks, bonds, mutual funds, exchange-traded funds and other investments. 

If you make more than $153,000 (or if you’re married filing jointly $228,000) as of 2023, you can’t contribute to a Roth IRA directly at all. You can, however, use a strategy called the back door Roth that can help you get your money into a Roth IRA through another avenue. 

3. Consider Investing in Low Cost Index Funds

An index in this is a group of stocks grouped by a person or organization. They were created for measuring stock market performance. 

For example, S&P 500 is an index and the common thread of these stocks is its the top 500 largest traded companies in the US. 

An Index fund is just a fund that tries to mirror the performance of a particular index like the S&P 500. 

Index funds are often better for the average investor because they perform just as well or better than professionally managed funds and have low fees. 

Since these funds are just tracking an index, they don’t require active management which means they are way cheaper to own than traditional mutual funds. 

Many people in their 30’s will go straight fora financial advisor to pick their investments for them, but this could cost thousands in fees. Managing your own investments can add hundreds of thousands of dollars to your retirement.

4. Learn About Stock Market Cycles So You Can Handle More Risk

When you understand that no one can accurately predict whether the stock market will go up or down, you realize that the best way to invest is consistently over a long period of time.

Historically the stock market’s annualized return is 10% (roughly ~8% after inflation). The more you can comfortably invest in stocks knowing that the stock market will fluctuate, the more you will increase the likelihood of a strong return. 

It’s also important to understand that the longer you invest, the more you decrease the likelihood of experiencing negative returns on your portfolio. The likelihood of a negative stock market return after 20 years of investing is less than 1%. If you aren’t retiring soon, you can handle more fluctuations in the market.

5. Prioritize Paying Yourself First

In your 30’s it can be hard to prioritize retirement savings, particularly if you have children, mortgages, car payments, and more. With the cost of food going up dramatically over 2022, things are getting more challenging economically.

That said, your greatest asset as an investor is time. The more time you spend in the market, the higher likelihood that the value of your investments will compound over time. 

For example, if you start investing at 35, you’ll have to contribute `$750 a month (assuming an 8% interest rate) to have 1 million in your account at 65.

If you wait until you are 40 and still want to have 1 million by the time you are 65, you’ll have to contribute $1150 a month. That’s over $400 more! 

You can not underestimate the power of time in the market. 

Getting started as soon as possible can make you much more likely to have a comfortable retirement.

If you’re ready to get started download my free guide on 26 need-to-know investing terms.

How to Pick 401k Investments

If you have no idea what your 401(k) is invested in without looking at it, you’re not alone. According to a NerdWallet study, well over 50% of professionals don’t know what investments they hold in their retirement accounts and 401(k)’s. 

If you do take a look at your 401k and you still don’t know what your investments actually mean, you’re also not alone. 63% of Americans don’t understand how their 401(k)’s work from an investment or a tax perspective.

You can easily learn exactly how to pick investment in your 401(k) that can help you retire years earlier.

Why Is It So Important To Learn How To Pick Investments for your 401(k)?

Learning how to choose and change your 401(k) investments overtime can help you make and save thousands of dollars over your lifetime.

Make no mistake, if you have a 401(k) you are an investor. 

When I first learned how to properly pick investments for my 401k rather than just selecting a default target date fund, I was honestly a bit embarrassed and I felt ashamed that I had thousands of dollars in an account and really had no idea what investments I held in my 401(k).

I also was really unclear of which option would be best for me. 

Once I learned how to pick investments in my 401k, I increased my returns and now will be able to retire years earlier. You can learn how to do this too!

Here’s How Your 401(k) Actually Works

Before we dive into choosing investments, let’s get on the same page about how your 401(k) account actually works. Your 401(k) is an investment account that your employer provides for you. There are two types of 401(k)’s your employer can offer. Both of these types of 401k’s allow you to contribute money but impact your taxes differently. 

A traditional 401(k) will allow you to reduce your taxable income but whatever amount of contributions you make to your 401k.

A Roth 401(k) which some employers offer, allows you to contribute after-tax money. So while you don’t get a tax break right now, your investments will grow tax free and you get tax free withdrawals in retirement.

At the end of the day, your 401k is an investment account. You contribute money and then you invest it in stocks or bonds.

For 2023, the 401k contribution limits have increased! An individual can contribute up to $22,500 in a 401(k), 403(b), and most 457 plans, up from $20,500 in 2022.

Choosing Your investments for Your 401(k)

Learning the basics of exactly how to pick investments for your 401k is something that should be at the top of your list for two main reasons:

  1. If you don’t learn how to choose your own investments you could be automatically invested in target date funds, which can carry very high fees. 
  2. Target date funds can often be too conservatively invested for young people, significantly reducing their returns, meaning they will have less money in retirement.

There are two main routes you can take for your 401(k) investment strategy. The first one is target date funds and the second one is to select a few of your own investments. 
Most people end up choosing the 401k default investment, which most of the time is going to be a Target Date Fund.

What is a Target Date Fund?

A target date fund is a mutual fund made up of other mutual funds and holds a mix of stocks and bonds. This investment will automatically rebalance investments for you and reduce your risk over time as you near retirement. The benefit of this investment is it truly is a “set it and forget it” strategy.

Target date funds are meant to carry more stocks and therefore more risk when you are younger, and then as you age the amount of stocks will decrease and the amount of bonds in the fund will increase to reduce your overall risk as you near retirement.  

For example, if you are looking at Fidelity’s target date funds, they are labeled Fidelity Freedom Fund 2030 or 2050 and that number refers to the date in which you are looking to retire. 

If you are looking to retire in 2030, your target date fund will have less stocks and more bonds to make sure the risk is lower since you are retiring earlier.

In contrast, if you are looking to retire in 2050, your target date fund will have more stocks and less bonds, a mix that will produce higher returns but carries more risk.

While these funds are great in theory, they can be very expensive and will eat into your returns over time.

Why Target Date Fund Fees Matter in Your 401K

Let’s pretend two different people invest $500 a month for 30 years.

Nancy invests this $500 into a target date fund with a fee (expense ratio) of .75%. Over 30 years, assuming an 8 % annualized return, she will have ~$649,000. 

Lisa on the other hand invests in index funds that have low fees of .03%. Assuming an 8% annualized return, her balance after 30 years will be worth ~$755,000. 

Lisa will have $106,000 MORE than Nancy just by selecting funds with low fees!

Warning, you may not always have the option to choose index funds with low fees in your 401(k) but more and more 401k plans are offering better investment options so it’s important that you at least check!

What’s An Index Fund and Why Is It A Good Pick For My 401(k)?

An index fund is an investment that tries to mirror the performance of a particular index.

An example of an index is the S&P 500. This is just a group of the top 500 largest US stocks. So an S&P index fund would hold all 500 of the top US stocks. 

Since these funds are just tracking an index, they don’t require active management which means they are way cheaper to own than traditional mutual funds and target date funds. 

So instead of investing in a target date fund, you can select a couple index funds and create your own diversified portfolio.

What Type of Index Funds Can I Pick For My 401(k)?

One really easy way to create an index fund portfolio for your 401k is to use 3 types of index funds

  1. A US or total market index fund
  2. An international index fund
  3. A bond fund

This portfolio will ensure you are invested in a diversified mix of US and international stocks and bonds. 

With this portfolio, you’ll have to make the choice of how much of your contribution should go to bonds versus stocks. Bonds typically have lower returns but help us reduce risk. Typically, you will want to invest heavier in stocks at a younger age and over time invest more in bonds.

A good rule of thumb to figure out how much you should invest in stocks is to subtract your age from 110. So if you are 30 years old, you could start by investing 80% of your contributions in stocks (in this example US and internationally) and 20% in bonds. 

This might seem complicated at first but it’s actually really easy to learn! If you want to learn more, check out my youtube video for more information on exactly how to pick investments in your 401(k)

I am not a licensed financial advisor. Tessitory LLC, Wealth with Tess, and Tess Waresmith will never provide financial advice of any kind. This article and everything on the website is for educational purpose only. I offer education, not prescriptive advice. The information that is found here are my opinions and the opinions of other readers/contributors, and should be taken as such. Some content may contain affiliate links or sponsored content — I will never work with a brand or showcase a product that I don’t personally use or believe in.

Understanding the basic cycles of the stock market can help make sure you don’t make big mistakes that could negatively impact your retirement savings long-term. In this article we will talk about why a stock market downturn can actually be beneficial to your 401k savings long-term and what to do with your 401(k) during recessions.

what to do with your 401k in a recession

What Happens to Your 401(k) in a Recession?

A recession or stock market crash can reduce that value of your 401(k) in the near-term. While impossible to predict, a recession could happen in 2023.

This happens because during any recessionary period, stock market correction, or bear market (when the market drops by 20% for a prolonged period of time), the overall value of the stock market will decrease. This means that no matter what you are invested in, the value of your account is likely to go down temporarily.

This is not a reason to panic.

If you have a 401(k), you are an investor. As investors, we need to expect to see 3 to 5 recessions during our lifetime. We also need to know that bear markets occur roughly every 3.5 years. Translation? Bear markets happen all the time. We should expect them to occur regularly and know that they will impact our investments in the short term. 

On the positive side, we can also expect that bear markets will end and that the stock market will return. Bull markets are when the market sees a 20% increase over a two month period. Bull markets tend to last longer than bear markets. After every bear market or recession in history, the stock market has returned to record highs. 

What You Shouldn’t Do With Your 401(k) When the Market is Down

Whenever the stock market takes a downturn, many people will start to pull back on contributions. When you stop contributing you not only lose the tax advantages of reducing your taxable income, you also miss an opportunity to grow your retirement savings further. Keep reading to learn why this is actually a huge opportunity to grow your wealth.

Some people will also cash out old 401(k)’s from previous employers to avoid further losses. 

As long as you don’t sell your stocks or cash out your 401(k), you haven’t actually lost any money. Cashing out your old 401(k)’s will subject you to a 10% penalty and you will miss out on the opportunity to benefit from a stock market return. 

What You Should Do With Your 401(k) in Recession or Bear Market

Continue to Contribute to Your 401(k) Even When the Market is Down 

If we continue to have a down market in 2023, you have the opportunity to buy into the stock market at lower prices. When the stock market returns (which historically it always has), your money will grow along with the increasing value of the stock market. 

Getting educated on the basic cycles of the stock market is one of the best ways to continue to invest through a recession with confidence. 

Stock market history clearly shows that we should expect that the stock market is going to drop significantly at least every few years. Knowing that this is a common occurrence can help us feel less panic during market downturns.

The history of the stock market also shows that bear markets usually recover and the value of the stock market increases to higher levels. This offers bigger returns to investors that stay invested and continue to contribute during a down market. 

Reduce 401(k) Fees To Keep More of Your Money

Most Americans don’t realize that their 401(k) has fees. Understanding what these fees are can help you save thousands of dollars. Did you know the average American will spend over $138,000 in fees? This can add up to a few additional years that we have to work in order to retire! 

There are two typical types of fees: investment fees called expense ratios and administrative fees.

Each investment that you have in your 401(k) has a fee called an expense ratio. This ratio is just an annual percentage of fees you have to pay for each fund in which you invest. You can think of this as the operating cost of a fund.

If you don’t know what fund you are invested in currently, you are probably invested in something called a target date fund, and these funds often have high fees. Learning exactly how to pick your own investments in your 401(k), such as index funds, can help you keep more of your money and earn higher returns in your 401(k).

When you invest in funds with high fees (high expense ratios), you are decreasing the amount of money you will keep in your account. This means you have less money that can benefit from the power of compounding.

Your 401(k) also has administrative fees. This fee is charged to pay for things like the platform and the maintenance of that platform that is being used to manage your 401(k). These fees are usually unavoidable until you leave a company. Finding this number can be challenging but you can always email your 401(k) provider or ask HR. Expect these fees to run around .4% and 1.4%.

Roll over old 401(k)’s into a Traditional or Roth IRA (taxes may apply)

Now that you know that your old 401(k)’s sitting with your former employer have administrative fees, you’ll want to get rid of those fee asap.

The best way to do this is to rollover old 401(k) into an IRA (individual retirement account). This will give you more options of what to invest in and will reduce the overall fees you are paying. 

You may decide to roll over your old 401(k) into a Roth IRA, which is an individual retirement account that uses after tax money. This means that you contribute with after tax dollars now, but that the account will grow tax free and you will get tax free withdrawals in retirement. 

Depending on how you are currently contributing to your 401k, you will likely have to pay taxes when you roll your money over to a Roth IRA, but you will then be able to have that money grow tax free and get tax withdrawals in retirement. For many, it’s worth paying the taxes now to get them out of the way.

The other benefit of rolling over your 401(k) during a bear market is that the value of your 401k is lower than it has been because the stock market is down. This means that the amount you will have to pay taxes on is lower than it has been! 

You’ll also likely have a wider selection of investment options once you roll over your 401k into an IRA. You’ll be able to find investments that best fit your needs and goals and a bigger option of funds with lower or even zero fees.

Rolling over your 401(k) does require some paperwork but Capitalize can help you do a lot of the work for free! If you’re ready to get started head on over to capitalize to learn more.

Final Thoughts On Managing Your 401(k) in a Recession

Don’t wait to take control of your finances and your 401(k). Continuing to contribute, lowering your fees, and rolling over old 401(k) accounts to IRA’s can help you continue to build wealth even in an uncertain economy.

If you’re ready to make the most of your 401(k), check out your free 401(k) checklist to learn more.

*I may receive commission for some links. I do not endorse or promote any products I don’t personally use or support.