Non-Retirement Investing - What Can Young Families Do?

As a family financial planner operating around the Greater Boston area, I work with young families of varying degrees of wealth, all trying to establish themselves in the region and plan for their future. The trouble that arises is that Greater Boston has some of the most expensive real estate in the country, and cost of living challenges can leave many young families feeling like they don’t have many options regarding building financial foundations if they want to get involved with a hotly competitive real estate market.

Questions I receive from my 20 and 30-something clients have to do with retirement planning, and it is seemingly working against their needs for liquid assets. Whether it’s to buy their first home, pay off student loans, or something else more immediate. “Why should I contribute to a Roth IRA when I can’t afford a down payment on a property to start my life and family?”

It’s a tough situation, and I feel for young families entering such a costly market. So, what can young families do for non-retirement investing?

Non-Retirement Investing – The Motivations

First, let’s consider the motivations here: people should mainly do non-retirement investing to diversify “asset location” rather than “asset allocation.” Liquidity is top-of-mind, having money earmarked toward more intermediate goals.

The default tax-advantaged retirement plans are 401ks, and the default college savings accounts are 529 plans. If money is withdrawn and not intended for those specific purposes, it can be penalized, lose its tax benefits, or both. The tax advantages are nice, but having the money available needs to be factored in, which is why young families are motivated for non-retirement investing opportunities.

What Are The Goals? They’re Not The Same For Everyone

The first question I ask clients who find themselves nearing the point of buying a home is, why do you want to invest in a property? It may sound odd, but times have changed, and some people decide to rent their entire lives because they choose to place their money in other investments to better suit their needs and lifestyle.

Historically, homeownership has been the biggest box to check off in the American dream list, but the barrier to homeownership is much higher than it used to be, accounting for inflation. If a young family is trying desperately to buy a home because they’re told it’s the wisest investment they can make, it may not be the right reason to do so.

For example, suppose I know someone passionate about investing more in their own business or is savvy about the stock market, but all their money would be tied up in a 30-year mortgage. In that case, purchasing a property may not make sense when other investment options align better with their lifestyle. Ownership is indeed one key to accruing wealth, but there are cases and moments in life when the overhead of ownership isn’t the optimal choice.

Non-Retirement Investing – Don’t Go for the “Silver Bullet” Schemes

There can be a sense of urgency and desperation to get in on hot markets when they get presented in the media. Gamestop and other meme stocks helped fuel a craze of reckless investments, and many young investors were looking to cash in quickly on the craze. I say this confidently: the get-rich-quick paths of investing rarely work, and banking on an investment bubble to fund your next big life purchase is very risky, and I would never recommend it.

Liquid Investment Options

I will tell most young families that if homeownership is their #1 goal, there are short-term investment vehicles that can be suitable to match their desired timeline. These vehicles are brokerage accounts owned individually or jointly. They are liquid investments, and inside of them, young families can buy things ranging from high-yield savings accounts, bonds, money market funds to stocks.

When I speak with clients about non-retirement investments, I tell them that the strategy will always depend on the timeline.

For near-immediate goals, within 0-2 years, I’d recommend very safe instruments, like high-yield savings accounts or treasuries.

For goals within 3-5 years, I’d recommend something more diversified – heavily weighted toward various bonds/stock ETFs.

For goals greater than 5+ years out, depending on risk tolerance, I’d consider incorporating an arrangement of heavily diverse stock ETFs.

Tax-Advantaged Accounts and Employer-Sponsored Opportunities

Saving for retirement and your first home doesn’t necessarily have to be mutually exclusive. Going back to the Roth IRA, which is a tax-advantaged investment account, while these are typically intended for retirement savings, Roth IRAs can allow penalty-free withdrawals of contributions (not earnings) for various reasons, including a first-time home purchase. Similar to that end, some employer-sponsored retirement plans, like a Roth 401(k), also allow penalty-free withdrawals of contributions for a first home purchase. If your employer matches contributions to your 401k, it should be taken advantage of, as money is left on the table otherwise.

Everyone’s Circumstances Are Different

As much as I’d like to say there’s a simple answer that all young families can look to, it’s not the case. Each family will have different goals, needs, and desires, and no one-size-fits-all program will be optimized to meet all those variables. Working with a financial planner and crafting strategies to meet goals helps families avoid wandering too far from the desired path.

For those looking for investment advice as they start their financial journey, please click the link to get my free guide:

“7 investment decisions you’ll need to get started.”

It outlines some fundamental strategies I use with my client and helps provide a holistic understanding of how investments should work for your life goals.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Stock investing includes risks, including fluctuating prices and loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.

Past performance is no guarantee of future results. No strategy assures success or protects against loss.

The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.