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A rep's guide to retirement investing.
When meeting with new clients from the pharmaceutical industry, I begin by discussing the tremendous earning and investment opportunities the profession offers. With discipline and time, your company-sponsored 401(k) plan can be a very important tool for the creation of a sizeable net worth. Indeed, everyone has an opinion about what a sizeable net worth is, but for the sake of this discussion, I will use the figure of $1,000,000 of investment assets, excluding your residence. From a planning perspective, I like the million-dollar goal. I think it's a goal investors can conceptualize, and it's attainable, particularly with the incomes we're seeing in the pharmaceutical industry today. If you are already at the $1,000,000 level, congratulations, and I recommend getting started on your second million. You have many investment options; however, your company-sponsored 401(k) plan is probably the first investment tool you should use. My intention here is to share with you how to capitalize on your company's 401(k) plan.
We are all faced with a myriad of investment choices, and I think most of those employed in the pharmaceutical industry understand the importance of saving and investing. However, I think prioritizing your options is necessary. Here is what I recommend:
1. Commit to saving. It's pretty simple stuff, but if you can't discipline yourself to save each month, there's nothing anybody can do to help.
2. Get your insurance coverage in order. Everyone's needs are different, but take a close look at your exposure.
3. Set up an emergency fund. The amount is unique to each household, but certainly put aside a minimum of three months' cash flow.
4a. Participate in your employer's 401(k) plan. In my opinion, investing in stocks and bonds begins with your company-sponsored 401(k) plan. Generally, you will have a number of elective investment choices, but matching contributions from your employer are often in the form of company stock. Bottom line, any time there's an offer to get savings matched, particularly with a tax shelter, you have to take full advantage of it. More about this in a moment.
4b. If there is no company-sponsored 401(k) plan or pension available, contribute to a Roth or traditional IRA. Make certain to let your company know that you want a 401(k) plan.
5. Take full advantage of your stock option programs. The pharmaceutical industry is a gigantic proponent of this fringe benefit, which is a complete topic in itself. I recommend seeking professional advice in this area.
6a. Depending on your income, you may be eligible for a Roth IRA in addition to your 401(k). If eligible, apply your maximum contribution to this before investing in a taxable account.
6b. If you're saving for college tuition, you should consider a 529C program. This is a unique, relatively new, tax-sheltered educational savings program.
6c. If one is available, participate in a company stock purchase plan that offers incentives, such as warrants. Depending on the plan and your company, you should weigh the benefits of these company-sponsored plans before investing elsewhere.
7. Invest with dollars that are not tax-sheltered or without incentives attached.
These are some of the typical investment choices; I simply advise placing a higher emphasis on the beginning of the list over the end of the list. I consider options 1 to 3 to be your basic prerequisites (non-negotiable) before investing for retirement funding.
Why do I place a high emphasis on the 401(k) plan for retirement savings? Bottom line, two attributes make the 401(k) a must-do investment option. First, many 401(k) plans offer what is referred to as the employer match. In fact, most pharmaceutical companies that offer a 401(k) plan include an employer-sponsored match that is a function of your contributions. Additionally, your company may offer a year-end profit-sharing contribution that is contingent on how the company performed over the year. Every plan is different in this respect, and it requires a little study to fully understand. Furthermore, matching contributions and profit sharing often adhere to vesting schedules tied to your years of service with the company. The obvious benefit is that, if offered, your company match provides free investment dollars that can help your retirement nest egg grow more quickly. The second important and significant attribute of your 401(k) is tax-related. 401(k) plans can offer contribution limits of up to 15% of your income, not to exceed $10,500.00 this year, on a pre-tax basis. This is profound when you compare it to after-tax investing, particularly when you consider the higher tax brackets associated with many of the incomes in pharmaceuticals. Furthermore, your investment grows tax-deferred inside of the 401(k) plan. That is, as a participant, there is no annual tax obligation for interest income or capital gains from your investments while they remain inside a plan.
I probably receive more questions about how to allocate 401(k) contributions than any other subject I field. The reality is that there is no one right answer. The first step is to understand your own personal risk profile and investment goals. If you have some time until retirement, my personal preference is an investment mix that is equity-based (stocks), because history, although not necessarily indicative of the future (there are no guarantees), tells us that equities tend to outperform bonds over the long term. Since I'm in the business of making recommendations intended to increase individual net worth for retirement, I feel it necessary to take the risk associated with equities in order to achieve long-term growth.
My industry places a high emphasis on "asset allocation," and most brokerage firms in the investment world offer models for asset allocation. In simplistic terms, the process involves understanding an investor's profile and then designing an asset mix into a portfolio, typically composed of cash, stocks and bonds. The purpose of asset allocation is to meet investor objectives and minimize portfolio volatility. Generally, if a client wants long-term growth, and understands that stocks can be a roller coaster ride, a fact certainly exemplified by the last 18 months, then I recommend an allocation heavily weighted in equities. I personally define a long-term investment as one that you intend to own for at least five years. Of course, you always run the risk of losing money in the stock market, even over a five-year period, and even with America's largest corporations. But diversity in your equity investments, combined with a long-term approach, should help to improve your returns. With all portfolios containing equity investments, I recommend a foundation usually composed of growth stocks and value stocks. The logic here is that growth stocks and value stocks have a history of performing conversely to one another, thus validating an element of portfolio theory and providing the investor with some balance. Most 401(k) plans give you many investment choices. When it comes to allocation, my advice is to begin with understanding your objectives and risk tolerance. Then review your investment alternatives and design a portfolio consistent with your objectives and risk tolerance that seeks balance between the investments. If you find the process confusing, you may actually want to seek advice from a professional about assembling your portfolio.
In reality, you can design a wonderful portfolio within your 401(k) that, over time, with matching contributions and favorable tax treatment, could compound into a sizeable investment portfolio. But if you don't embrace priority number one - commit to saving - then creating a high net worth is nearly impossible. The key is to live within your means, and put money away each month. If you haven't read "The Millionaire Next Door," by Thomas J. Stanley, read it. The pharmaceutical industry provides you with all the tools. High compensation, wonderful incentive savings plans and a plethora of fringe benefits all come to mind. Even the money you save by simply utilizing the company car is an excellent example of compensation that can help with saving. So use the tools, exploit your 401(k) plan, be disciplined, and with time, you can be among the affluent. PR