America kicks off its birthday celebration weekend today.
The markets might be the last thing on your mind right now — but not so fast. We’re in the market’s summer doldrums, and it pays to take advantage of slower moments like these.
Traders like my colleague Adam O’Dell use time like this to build and improve their trading systems. Long-term investors like Warren Buffett use it to read and think. And people like you and me can use it to make sure we’re on track to meet (or exceed) our investing and saving goals for 2021 and beyond.
So, before you hit the pool with a case of your favorite beverage in tow…
Let’s do a quick, three-step assessment.
Retirement Plan Step 1: Prioritize Your New Savings
I rate this as the top priority because it can have a major impact on both your tax bill and on how quickly you’re able to accumulate savings.
That first dollar of new savings should almost always go to your 401(k) plan. I say “almost” because there are reasons why you might not want to invest in a 401(k), such as immediate liquidity needs. If you might need the money in the near term, it doesn’t make sense to lock it up and risk paying taxes and penalties on the withdrawal.
But for money you’re comfortable locking up for a while, the 401(k) is the only destination that makes sense for that first dollar of savings. If your employer matches you dollar for dollar — and many do — you earn an immediate 100% on your investment the day you make the contribution.
My rule of thumb is that you should max out your 401(k) before considering anything else. In 2021, you can contribute $19,500 to your 401(k) plan or $25,000 if you’re 50 or older. And that’s before the matching. If you earn $100,000 and your employer offers a 4% match, that’s another $4,000 added to the account.
And naturally, all of this grows tax-free. So again, your savings priority should always be to max out the 401(k) first. Everything else in your retirement plan comes next.
Step 2: Make Your Allocation Tax Efficient
I could write a book on asset allocation… and plenty of people have. But we can keep this simple.
We know that certain investments and trading strategies are more tax-efficient than others. A buy-and-hold position in an S&P 500 index fund generates essentially nothing in taxable income until you sell it. So, that’s something you can keep in a taxable account if your IRA and 401(k) funds are limited.
But bonds? Bonds are one of the most tax-inefficient investments you can ever make. Bond interest is taxed at your marginal tax rate, so keeping your bonds in a tax-free retirement account makes all the sense in the world. The same is true of shorter-term trading strategies and even collectibles or precious metals. All of these are wildly tax-inefficient, so holding them in a tax-free account is a no-brainer.
Retirement Plan Step 3: Prune a Little
Not every stock you pick will be a winner, and not every trading strategy works out as planned. That’s fine. Your portfolio is like a tree. For the most part, you can leave it alone and let it grow. But pruning it from time to time keeps it healthy. You want the stronger branches to grow, so it’s best to cut off the unhealthy branches to give those healthy ones more room.
Use this time to give your portfolio a good look. If you have some stocks or strategies that aren’t working out as planned, this might be a good time to cut them loose and look for some new ones.
And naturally, we can help with that!
If you’d like to learn more about Adam’s highest-conviction stock recommendations, guidance on when to get in and out of these investments and how he uses the Momentum Principle to “buy high … sell higher,” click here for the details on Green Zone Fortunes and Adam’s Millionaire Master Class.
To safe profits,
Charles Sizemore
Editor, Green Zone Fortunes
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
Story updated on July 2, 2021.