Client Question: Timing of Savings

June 19, 2024

I talked with clients this week regarding their savings plan for the year. The question of timing came up – ie: when should they deploy cash they now have on hand into their various accounts. Let’s look at the items we discussed

Roth IRAs

One of the accounts my clients are able to fund in 2024 (via a backdoor Roth transaction) are their two Roth IRAs. I advised them to fund these fully immediately in full. Of course, with the market at all time highs, it’s easy to think “let’s wait for a pullback.” However, these clients are in their late thirties and as a result, have a long investing timeframe. If markets do what they should, many more new highs will be reached. And as you may recall, Roth accounts (in IRA or 401k form) have immense tax advantages, namely tax free appreciation and earnings on the money in perpetuity. As a result, if you are able to fund these accounts, consider doing so as soon as you can. Please note that if you plan to fund a Roth IRA directly (ie: not via backdoor Roth process), you will want to evaluate your income for the coming year and be sure you will not exceed the allowable amount for Roth IRA contributions

Employer plans

When it comes to the timing of employer plans (401ks, 403bs, etc), it is important to first understand the mechanics of your plan. Many of these plans have employer matching elements where the company will put in a dollar amount or percentage contingent upon what you, the employee, contributes. While some employers process these contributions per pay period, others contribute in one large sum once per year. For this particular client, his employer contributes per pay period. As a result, it is in the client’s best interest to contribute at least the required matching level amount (4%) per pay period so he can get the full match. If the match was once a year and/or if there were not match, I may have advised him to fund it as soon as he was able to start earning a return on those funds (especially the Roth 401k portion – see above)

Self-Employed Retirement Savings

These clients also have a self-employed retirement account (an individual 401k account). For these accounts, the amount you can contribute is based upon net self employment income and with most small businesses, that income can vary widely from year to year. While it would be nice to start saving sooner vs. later (or to average it in over the year and start the tax deferred/tax free appreciation of the funds), for this account, I advised them to wait until later in the year when self-employment income would be known. This is to prevent overfunding the account and having to adjust it, which can result in unnecessary taxation and penalties.

If you are in a situation where you have already earned enough to fully-fund the account and/or have strong conviction you will do so during the year, you may adjust the approach to meet your needs

After Tax Savings

Once they fund their Roths and max out employer plans (while reserving for self-employed savings at year end), it is time to save in after-tax/brokerage/non-retirement accounts. They have a portion of cash set aside now for this and also anticipate that additional cash may be available each month moving forward.

If you have been a loyal reader, you will know my thoughts on market timing (namely that it is a fools’ errand). As a result, when investing new cash into the market, I tend to set a deployment plan and then execute against that. The deployment plan will vary based upon the amount of cash, the percentage it represents, the current dynamics in the market, and the client’s specific fact pattern and risk profile. Barring any unusual market swings during the time period, cash is invested as originally planned. With these clients, we agreed that a 2 month time period would make sense, during which the cash will be evenly split and deployed based on their target allocation.

With the additional funds moving forward, those will be invested as received. This is a concept known as dollar-cost averaging, meaning you invest at all different time points and as a result, are able to “buy in” at all different price levels as the market moves – thereby averaging out your cost. This is how employer plans operate – deploying your cash via payroll deferrals each pay period. This is an effective “set it and forget it” approach to investing that serves people very well.

As with all matters in investing, the timing for your savings plan may vary but I hope these general thoughts prove helpful as you set your approach.

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