Key Takeaways:
- Investing a portion of your income through a monthly automatic deposit plan can add discipline to your investing strategy through technology.
- Your risk tolerance is part of your investment personality. Your retirement portfolio should be aligned with your investment personality and long-term financial objectives.
- Consider setting up a traditional or Roth IRA, SEP IRA, or defined benefit plan. If you are a business owner, establish and contribute to your retirement plan.
Invest Regularly, Automatically, and Early
Invest early and often. It’s sage advice. All it takes is discipline and time. Regularly investing a percentage of your earnings, say each month, should be a habit. It’s an important element to wealth accumulation. What’s more, investing a portion of your income though a monthly automatic deposit plan can add discipline to your investing strategy through technology.
Why You Should Start Investing Early
Examples below assume a $5,000 initial investment plus $500 monthly with 5% growth, compounded monthly. The prosperous professional, for example, who started at age 25, grew her wealth to over $1.342 million by age 75. By contrast, the portfolio of an investor who started at age 45 grew to $429,296 in 30 years. The moral of the story: don’t wait.
| – AMOUNT ACCUMULATED – | |||
| Age Started Investing | At Age 55 | At Age 65 | At Age 75 |
| 25 | $429,297 | $776,462 | $1,341,957 |
| 35 | $216,179 | $429,297 | $776,642 |
| 45 | $85,326 | $216,179 | $429,297 |
This hypothetical example does not reflect the actual performance of an investment. Assumes all earnings are reinvested and excludes taxes and fees. Source: BankRate Monitor.
Assess Your Tolerance for Risk
Risk tolerance is a common investment phrase. It questions how much potential for loss you are willing to accept for potential gain. Investors are typically categorized into aggressive, moderate, and conservative. Some investors may be a combination. Which are you?
Knowing your appetite for risk—or lack thereof—is a significant factor in determining what you should invest in, and in determining your optimal portfolio allocation. Your risk tolerance is part of your investment personality. Your retirement portfolio should be aligned with your investment personality and long-term financial objectives.
Investing a portion of your income through a monthly automatic deposit plan can add discipline to your investing strategy through technology.
Several factors determine the level of risk you may consider taking. Swings in stock prices, inflation, interest rates, political, global, and economic events, and regulatory issues all may impact your risk tolerance.
When planning for retirement, your financial goals, age, and current income also contribute to your view of risk. The most critical personal considerations in determining your risk profile include:
TIMING — How many years from now do you expect to begin making withdrawals, and for how many years?
INCOME — From now until you retire, do you expect your annual income to stay the same, grow somewhat, or grow a lot?
PROTECTION — Is protecting your portfolio paramount? Is it more important than the portfolio’s growth rate? What range of outcomes might be acceptable to you?
GROWTH — Are you willing to withstand some or substantial price fluctuations in return for the potential of higher long-term growth? Or do you suffer angst when you lose even a little, even on paper?
Your risk tolerance is part of your investment personality. Your retirement portfolio should be aligned with your investment personality and long-term financial objectives.
Invest in a Retirement Plan that Best Meets Your Needs
You’ve saved early and often, and evaluated your personal risk tolerance profile, what’s next? The next step is to take advantage of the best retirement plan program for you. For example, if you are employed, make sure to invest in your company’s 401k plan. Consider setting up a traditional or Roth IRA. If you are a business owner, establish and contribute to your own SEP IRA, or defined benefit plan. Basic retirement plans include:
Personal Plans
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS (IRA) — An IRA lets you defer paying taxes on the money in your account. You can make either pre- or after-tax contributions. You pay taxes only when you withdraw money, which also may be when you are in a lower tax bracket. You don’t pay taxes on any growth in the account. Withdrawals after age 59½ are also tax-free. You choose and manage traditional IRAs yourself.
ROTH INDIVIDUAL RETIREMENT ACCOUNTS (ROTH IRA) — A Roth IRA is similar to a traditional IRA. The primary difference is the Roth IRA rules. It’s typically best if you anticipate being in a higher tax bracket when starting to make withdrawals.
Employer–Sponsored Plans
401(k) — Some companies will match your investment dollar for dollar up to 6% of your income. (Others may match with different amounts.) For instance, for every $100,000 earned annually, you can contribute up to $6,000 to your 401(k) and the company contributes another $6,000 to your account. It’s like free money, and tax-deferred.
403(b) — A 403(b) plan is only available to public school employees and some charities. In most cases, all other features are the same as in 401(k) plans.
457(b) — A 457(b) plan is offered primarily by government agencies. They are structured similarly to 401(k)s. Withdrawal rules and contribution limits are different.
SEP IRA — A SEP-IRA (Simplified Employee Plan) is a relatively simple retirement plan for small businesses to establish. As an owner, you can make large contributions for yourself and your eligible employees. You can also change your contributions each year—or miss a year.
Retirement Plan Comparisons
The table below is a simplified comparison. The mandatory distribution age for all plans is 72. Penalties for early withdrawal typically are 10% of the amount withdrawn.
| RETIREMENT PLAN | 2023 Maximum Contribution | 2023 Catch-Up Contribution | 2023 Total Contribution | Best For |
| – PERSONAL PLANS – | ||||
| Traditional IRA | $6,500* | $1,000 | $7,500 | Tax Deferral Today |
| Roth IRA | $6,500* | $1,000 | $7,500 | Future Tax-Free Withdrawals |
| – BUSINESS PLANS – | ||||
| 401(k) | $22,500 | $7,500 | $30,000 | Potential Employee Match |
| 403(b) | $22,500 | $7,500 | $30,000 | Public School Employees |
| 457(b) | $22,500 | $7,500 | $30,000 | Government Agencies |
| SEP IRA** | – | – | $66,000 | Small Business |
*$7,500 if over age 50. All contributions grow tax deferred except ROTH IRA, which grow tax free.
**SEP-IRA contributions for 2023 cannot exceed the lesser of 25% of compensation, or $66,000.
Consider Other Accounts
What if you’ve maximized your personal and/or business retirement contributions? If you’ve done so, congratulations! But as you know, government-authorized retirement plans have limits on the amount you can invest each year.
You can, of course, invest for your retirement outside of a formal retirement account. And do so without dollar limitations. Simply earmark one (or more) of your investment accounts as retirement-only funds—and have the discipline to spend that money only after you officially retire.
Consider setting up a traditional or Roth IRA, SEP IRA, or defined benefit plan. If you are a business owner, establish and contribute to your retirement plan.
Final Thoughts
At Lawson Kroeker, we spend a significant amount of time thinking about our clients’ future goals, their financial plans and our role in helping them get to where they want to be. We know our clients have many retirement planning and wealth transfer options available. We also understand sometimes life happens and that you need your resources at hand in case of an emergency.
It is important to take all of these considerations into account when thinking about how to grow your money for retirement. We construct a custom retirement plan just for you.
About Lawson Kroeker
Lawson Kroeker Investment Management, founded in Omaha, Nebraska is a third-generation wealth management firm that helps a select group of high-net-worth clients achieve their life goals by providing investment advice and building custom investment solutions.
Lawson Kroeker provides a broad, thoughtful, prudent, and ongoing financial roadmap tailored to each client. We focus on and understand each client’s risk tolerance and needs—whether growth, capital preservation, tax mitigation, or special situations. We also help clients with trust and estate management and philanthropy services.
Adam Yale, Partner and Portfolio Manager—Mr. Yale started his investment career in 1997 with First Manhattan Co., an investment advisory firm in New York, NY as an analyst of publicly-traded real estate securities and direct real estate investments. From 2006 until the 2022 merger with Lawson Kroeker, Adam was the sole Principal at Red Cedar Capital, LLC, a Registered Investment Advisory firm he founded that employed a fundamentals-based investing strategy. He earned a B.A from the University of Michigan and a Master’s in Accountancy from the University of Denver.
Bruce Van Kooten, CFA®, Partner and Portfolio Manager—Mr. Van Kooten has been a Lawson Kroeker Partner and Portfolio Manager since 2006 and has more than 45 years of institutional and private investment management experience. Bruce has worked as a trust investment officer with First National Bank of Omaha and as a senior investment portfolio manager at KPM Investment Management and Wells Fargo Private Asset Management in Denver. Bruce earned the Chartered Financial Analyst (CFA®) designation in 1987 and is a member of the CFA® Society of Nebraska. He has a Bachelor of Science degree in Business and Economics from Iowa State University.
Chad Clauser, CFA®, Partner and Portfolio Manager—Mr. Clauser began his investment career as a senior analyst at an Omaha-based investment advisor Tributary Capital Management, and later as vice president of the New York investment bank Credit Suisse. He earned the Chartered Financial Analyst (CFA®) designation in 2009 and is a member of the CFA® Society of Nebraska. Chad attended the University of Nebraska in Lincoln, where he received a bachelor’s in Finance and completed minors in both computer science and mathematics.
Tom Sudyka, Jr. CFA®, Partner and Portfolio Manager—Mr. Sudyka began his career as a portfolio manager with several large Midwest-based investment management companies. He served as a managing director and founding partner of BPI Global Asset Management before joining Lawson Kroeker in 1999. His investment decisions are guided by his 30+ years of investment management experience. He has an M.B.A. in Finance from the University of Nebraska and a B.A. in Finance from Creighton University.
Articles in This Series
PART 1: The 10 Questions to Ask When Planning for Retirement (click here)
PART 2: Retirement Planning: 7 Essential Life Issues to Consider (click here)
PART 3: Building Wealth for Retirement: Strategies for Financial Security (This article)