Good afternoon, everybody. We are very glad that you’ve joined us today for our Investment Fundamentals webinar. If you experience any difficulties with the technology, please call our office at 509-396-0588, and one of our team members will be happy to assist you. Everyone has been muted, so you will not be able to speak during the webinar. We are also recording this session for future use. As with our past webinars, we are not able to activate the instant message or question feature within Zoom, and there will not be a survey at the conclusion of today’s presentation. If you have any follow-up questions, please send them to one of our team members or to our general email box at info@cswteam.com. Again, we’re very glad you’ve joined us today.

Thank you, Melissa. I hope everyone is having a great day.

Today’s topic is Investment Fundamentals. We’re going to keep the discussion relatively high level, but if you have questions about anything we cover, please do not hesitate to reach out. Any member of our team would be happy to discuss these concepts in more detail.

Today, we’re going to walk through five key steps. First, we’ll discuss establishing an emergency fund. Second, we’ll review paying off debt. Third, we’ll cover investing in retirement accounts, including different types of plans such as 401(k)s, 403(b)s, traditional IRAs, and Roth IRAs. Fourth, we’ll discuss investing beyond employer retirement plans through diversified after-tax investment accounts. Finally, we’ll look at other investment opportunities and considerations that may fit into a long-term financial strategy.

Step One: Build a Rainy-Day Fund

The first step is really the foundation of financial planning. Many Americans would struggle to cover an unexpected expense of $1,000. Whether it’s a new roof, a major car repair, or replacing a heating and cooling system, unforeseen expenses happen. Unfortunately, short-term loans can be difficult to obtain, often come with high interest rates, and generally have low borrowing limits.

Because of this, one of the most important financial habits is establishing a rainy-day fund. We typically recommend maintaining three to six months of living expenses in readily accessible savings. Depending on your comfort level and overall financial situation, this could mean maintaining anywhere from $15,000 to $30,000 or more in emergency reserves. The goal is simply to ensure that you have resources available when life inevitably throws something unexpected your way.

Step Two: Pay Off Debt

Once your emergency fund is in place, the next step is evaluating and paying down debt. We generally look at debt in tiers based on interest rates.

The first priority is high-interest debt, particularly credit card balances. Credit card interest rates can create a significant drag on monthly cash flow and are often one of the biggest obstacles to building long-term wealth.

The next category is moderate-interest debt, such as many vehicle loans. Whether it makes sense to pay these off quickly often depends on the interest rate. Some manufacturers offer promotional financing rates of 0%, 1%, or 2%, which can make financing more attractive. On the other hand, loans carrying interest rates of 7% or 8% may deserve more immediate attention.

Finally, there is lower-interest debt, such as mortgages. Many homeowners still carry loans with historically low interest rates, and in some cases mortgage interest may provide tax benefits as well. The key takeaway is to thoughtfully review each debt obligation and prioritize the ones that are costing you the most.

Step Three: Invest in Retirement Accounts

After establishing an emergency fund and addressing high-interest debt, the next priority is retirement savings.

Today’s retirees rely much more heavily on their personal savings than previous generations. Historically, pensions and Social Security provided a large percentage of retirement income. Today, pensions are far less common, which means individuals must save more on their own.

Employer-sponsored retirement plans such as 401(k)s and 403(b)s are often the best place to begin. For today’s discussion, you can think of a 401(k) and a 403(b) as essentially the same type of retirement savings vehicle. The primary difference is simply the type of employer offering the plan.

One of the greatest benefits of these plans is employer matching. If your employer offers a dollar-for-dollar match up to a certain percentage of your salary, that match represents an immediate and significant return on your contribution. Whenever possible, we strongly encourage taking full advantage of any employer match available to you.

For 2024, employees can contribute up to $23,000 to a 401(k) or 403(b). Individuals age 50 and older may contribute an additional $7,500 through catch-up contributions, bringing the total annual employee contribution limit to $30,500. These limits apply only to employee contributions and do not include employer matching contributions or profit-sharing contributions.

Traditional vs. Roth IRAs

Let’s take a closer look at Individual Retirement Accounts, or IRAs. Unlike a 401(k) or 403(b), which are sponsored and administered by an employer, an IRA is an account that you establish and own individually.

A Traditional IRA allows you to make contributions on a pre-tax basis, assuming you qualify for the deduction. The money grows tax-deferred, and you pay ordinary income taxes when you withdraw the funds in retirement. If you withdraw earnings before age 59½, you may be subject to taxes and penalties. The primary benefit of a Traditional IRA is receiving a tax deduction today while deferring taxes until retirement.

A Roth IRA works differently. Contributions are made with after-tax dollars, meaning there is no deduction when you contribute. However, the money grows tax-free, and qualified withdrawals in retirement are also tax-free. One additional benefit of a Roth IRA is that your contributions can generally be withdrawn without taxes or penalties because taxes were already paid on those dollars. For individuals who expect to be in a higher tax bracket later in life, or who simply value tax-free retirement income, a Roth IRA can be a valuable planning tool.

For 2024, the contribution limit for both Traditional and Roth IRAs is $7,000, with an additional $1,000 catch-up contribution available for individuals age 50 and older. While income limits can affect eligibility to contribute directly to a Roth IRA or deduct Traditional IRA contributions, it’s important to note that these income limits do not apply to Roth contributions made within most employer-sponsored retirement plans.

Understanding Taxes and Retirement Contributions

A common question is whether someone should contribute on a pre-tax basis or a Roth basis. A simple rule of thumb is to consider your current tax bracket versus your expected retirement tax bracket.

If you believe you’ll be in a lower tax bracket during retirement than you are today, pre-tax contributions may make sense because you’re receiving a larger tax deduction now and paying taxes later at a potentially lower rate. Conversely, if you expect to be in a higher tax bracket later, Roth contributions may be more attractive because you’re paying taxes now and avoiding taxes on future growth.

Taxes are only one factor, however. Future tax laws, retirement income sources, and personal preferences all play a role. This is why retirement planning often requires a personalized evaluation rather than a one-size-fits-all solution.

The Power of Compound Interest

One of the most powerful concepts in investing is compound interest. Simply put, compound interest means you earn returns not only on your original investment but also on the earnings generated by that investment over time.

The biggest advantage an investor has is time. The earlier you begin saving, the longer your money has to grow. Even relatively small contributions can become significant over several decades because each year’s growth builds upon prior growth.

A helpful tool for understanding this concept is the Rule of 72. By dividing 72 by your expected rate of return, you can estimate how long it will take your money to double. For example, at a 7% annual return, an investment would be expected to double approximately every 10 years. At a 10% annual return, the investment could double in roughly seven years.

That’s why one of the most important pieces of financial advice is to start as early as possible. Even if you begin with modest contributions, time can be an incredibly valuable asset.

Step Four: Invest in a Diversified After-Tax Account

Let’s assume you’ve built an emergency fund, paid off high-interest debt, and are contributing appropriately to your retirement accounts. What’s next?

For many people, the next step is saving money in a diversified after-tax investment account.

These accounts do not provide the same tax advantages as retirement accounts, but they offer flexibility. Unlike retirement accounts, funds can generally be accessed at any time without age restrictions or withdrawal penalties.

At this stage, we’re often helping clients save for future goals, create additional financial flexibility, or accumulate assets beyond what retirement plans allow.

Understanding Diversification

Diversification is one of the most important principles in investing. Rather than relying on a single investment, diversification involves spreading investments across different asset classes, industries, and investment types.

Research has shown that a significant portion of a portfolio’s long-term performance is driven by asset allocation. In other words, the mix between stocks, bonds, and cash often matters more than selecting individual investments.

For example, a portfolio consisting of 50% stocks and 50% cash will generally behave very differently than a portfolio invested entirely in stocks. Neither portfolio is inherently right or wrong. The appropriate allocation depends on your goals, risk tolerance, and time horizon.

Types of Investments

Most diversified portfolios are built using three primary asset classes: cash, bonds, and stocks.

Cash is generally the most conservative asset class. It provides stability and liquidity, though typically with lower long-term returns.

Bonds represent loans made to governments or corporations and typically provide income while carrying moderate levels of risk.

Stocks represent ownership in businesses. Historically, stocks have provided the greatest long-term growth potential, but they also experience the greatest short-term volatility.

The appropriate balance between these asset classes depends on each investor’s unique situation. Someone with a long time horizon may be comfortable owning more stocks, while someone nearing a major financial goal may benefit from greater stability.

The Importance of Diversification

A common question is, “Why not just invest entirely in the best-performing investment?”

The challenge is that nobody consistently knows ahead of time which investment will perform best. Diversification helps reduce the risk of relying too heavily on any single investment or asset class.

By spreading investments across multiple areas, investors may improve consistency and reduce the impact of underperformance in any one area. Diversification doesn’t guarantee positive results, but it remains one of the most effective tools available for managing risk.

Time in the Market vs. Timing the Market

Another important investing principle is that time in the market is generally more valuable than attempting to time the market.

Markets experience periods of growth, decline, and volatility. However, over long periods of time, markets have historically trended upward. Because accurately predicting short-term market movements is extremely difficult, many investors are best served by remaining invested and focusing on their long-term objectives.

For younger investors especially, time is often one of the greatest advantages they possess.

Rebalancing a Portfolio

Rebalancing is the process of periodically adjusting a portfolio back to its intended allocation.

For example, if a portfolio was designed to hold 70% stocks and 30% bonds, strong stock market performance may eventually shift that allocation to 80% stocks and 20% bonds. Rebalancing would involve selling some of the appreciated stock positions and adding to the bond allocation.

This process helps maintain the intended risk level and often encourages investors to systematically “buy low and sell high.”

Step Five: Other Investment Opportunities

After completing the first four steps, some investors choose to explore additional opportunities. This category might include individual stocks, rental properties, business investments, or other specialized strategies.

The key point is that these opportunities generally come after the fundamental building blocks are already in place.

Understanding Stocks

When you purchase stock, you’re purchasing ownership in a company. If the company’s value increases, the value of your shares may increase as well.

In addition to potential growth, some companies distribute a portion of their profits to shareholders through dividends. These dividend payments provide another source of return and can become an important source of income over time.

Dollar-Cost Averaging

One of the most effective ways to manage investing emotions is through dollar-cost averaging.

Dollar-cost averaging involves investing a fixed dollar amount on a regular schedule regardless of market conditions. For example, someone might invest $500 every month into a diversified portfolio.

When prices are lower, those investments purchase more shares. When prices are higher, they purchase fewer shares. Over time, this can help smooth market volatility and encourage disciplined investing behavior.

Many employer-sponsored retirement plans naturally use this approach through payroll deductions, which is one reason they’re such powerful savings tools.

Why These Steps Matter

The retirement landscape has changed dramatically over the years. Previous generations often relied heavily on pensions and Social Security. Today, a significantly larger portion of retirement income is expected to come from personal savings and investments.

As a result, individuals have greater responsibility, but also greater flexibility, in determining their financial future.

While everyone’s situation is different, a good starting point for many people is saving between 10% and 15% of their income toward retirement. The earlier those savings begin, the more opportunity they have to benefit from compound growth.

Creating Retirement Income

Eventually, every investor transitions from accumulating assets to generating income from those assets.

Retirement income can come from many sources, including Social Security, pensions, rental income, dividends, bond interest, and withdrawals from investment accounts.

Some retirees prefer income-focused investments that generate regular payments. Others remain invested in growth-oriented portfolios and meet spending needs by periodically selling shares. Both approaches can be appropriate depending on individual goals and circumstances.

The Bucket Strategy

One strategy often used in retirement planning is the bucket approach.

The first bucket contains short-term assets such as cash and money market funds. This bucket is designed to cover six to twelve months of spending.

The second bucket contains intermediate-term assets, often invested conservatively enough that they can provide income over the next three to five years.

The third bucket contains longer-term growth assets intended to support spending needs many years into the future. Because these assets may not be needed for a decade or more, they can often remain invested more aggressively.

This structure can help provide peace of mind by ensuring near-term spending needs are covered while giving long-term assets time to grow.

Closing Thoughts

Investing fundamentals ultimately come down to following a sound process. Build an emergency fund, eliminate high-interest debt, take advantage of retirement accounts, diversify investments appropriately, and maintain a long-term perspective.

While the concepts themselves may seem straightforward, applying them effectively often requires thoughtful planning and periodic adjustments along the way. Every individual’s goals, circumstances, and timeline are unique, which is why ongoing conversations and personalized planning can be so valuable.

Thank you again for attending today’s webinar. We appreciate the opportunity to work with you and help guide you through these important financial decisions. If you have any questions about the topics we discussed today, please don’t hesitate to reach out. We would be happy to help.

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