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Best Investing Order For Artists

Best Retirement Investing Order For Artists. Where Do I Go?

With so many different investing vehicles around, you might be thinking where do I even start?  401k, Roth IRA, HSA- there are so many!  Today we’re going to review the best retirement investing order for artists.  A plan so fool proof, even dear Jack would understand exactly what to do with those beans.

We’ve talked a lot about these different tax advantaged accounts over the last few months.  Some you will have immediate access to, some you won’t.  And there are even more retirement options to cover yet (SEP IRA, Solo 401k), but at this point we have a pretty good foundation.

It’s prudent to mention early on, you shouldn’t even be thinking about investing until you have a properly funded emergency fund.  Don’t forget to Be Prepared.

Let’s say you do though.  The question then becomes: which investing account is the priority?  

The short answer: if you’re investing in ANY of these accounts and growing your financial egg for the future…you’re already whipped into shape.  So, don’t stress.

But, there are ways to make the most of all the available options on the table!  In thinking about the best investing order for artists, we’re going to cover all the angles.

Never Enough

First off let’s assume you are part of a labor union that works inside of the performing arts.  If you are an Actors Equity Actor, a Director or Choreographer part of the Stage Directors and Choreographers Union, a professional Musician part of Local 802, or a professional Designer part of Local 829- you are likely enrolled in a Pension Plan tied to one of these various unions.

It’s hard for us to say exactly what your pension will yield, because it’s all tied to the amount of work you labor to produce over the course of your career lifetime.

As a means of example: I have a friend in their early 30s who is an AEA actor.  This person has spent a number of their performing years in their 20s on Production Contract.  We calculated that if this person made an average of $40,000/year in performing through the next 30 years, they would be entitled to about $5,000/month in retirement from their pension at retirement.

At first thought: that’s pretty good!  That’s the beauty and power of a pension.  If this actor can earn that yearly average in union work, they’ll have a nice little nest egg flowing their way at retirement (for the rest of their life).

But let’s think about this for a moment.  That same actor is used to making $100,000/year now.  And this pension will provide for $60,000/year in 30 years from now.  That’s 30 years of inflation also, where we expect costs to rise about 2-3% every year  (are you taking advantage of 5% high interest savings accounts yet to maximize your emergency fund savings against inflation?).  

Best Investing Order For Artists
A pension will only cover a portion of what you’re going to need in retirement.

So that $60,000/year in 2050 is actually worth a lot less then than it is now.  Which is why even if you have a pension, it’s still important to invest for retirement.

Step One, They’ll Match 401K, So I Put In There Too!  Step Two…

Which brings us to Creative Finance!  How do you invest for the future?  Where is the first place you go?  What is the best retirement investing order for artists at the end of the day?

1. 401k Match

This is the number one priority for folks that have access to an employer sponsored 401k program.  Get. That.  Free.  Money.

We’ll do a whoooole other post on 401k matching in the future, but in the meantime if your employer or contract offers a chance to get a 401k match, do it! 

Matchmaker, Matchmaker, give me a 401k match!

Employers will often match up to a certain % of your gross pay.  For example, they might offer to match 50 cents on the dollar up to 6% of your pay.  Meaning if you make $60,000 per year, your employer would match up to $3,600 if you contribute $7,200 to your 401k plan.

That’s $3,600 in free money to you (have I said free money enough times to hammer home the point yet?).

This is your first step in looking at the picture of your investing order.  A 401k is an investment account after all.  This free money gets invested for your future, and compound interest does the rest.

2. Roth IRA

After you have achieved the highest possible match in your 401k, we turn our attention back to the golden goose of retirement accounts- our friend the Roth IRA.

I did a whole post about Roths earlier this year, and outline exactly who is eligible for this account (spoiler alert: pretty much everyone), and why it is such an amazing advantaged account I highly recommend you start using.

But in a nutshell- the Roth IRA provides for tax-free growth and compound interest on all the money you invest (capped at $6,000/year in 2020).

That means when you’re ready to withdraw these monies in retirement, you will not pay tax on all the dividends and growth you’ve accumulated over the years.

I think a huge mistake folks make in investing is skipping the Roth altogether and just opening a taxable brokerage account to invest in stocks with.  Why invest in an account you must be taxed on when this great account exists to give you a huge benefit?  The Roth must be high up on the best retirement investing order for artists- use it to your advantage!

3. HSA – Health Savings Account

After you’ve maxed your Roth to the brim – or you know you are on the path to max it out with regular monthly contributions ($500/month), let’s continue down the path of tax advantaged accounts.

Before pivoting back to the 401k, don’t forget about the handy dandy HSA!  We also talked about the HSA account earlier this fall in my review of Lively (a great company that makes holding this account so easy).

The HSA is an account you can contribute to (capped at $3,550 in 2020), which has the potential for triple tax advantages.  

When you contribute funds the HSA you get a tax credit for that contribution, the money then sits and grows tax free with compound interest, and this account offers the unique advantage of being able to withdraw money at any time with no penalty for qualified medical expenses.

What are the qualifiers here?  You will need a High Deductible Health Plan to be able to use an HSA.  But if you can use this account- make this priority #3 in your order of operations.  If you can max this account out in a tax year, that’s another $3,550 you get to deduct from your taxes!

4. 401k Remainder

Really man???  Come on, by this point I want to be able to invest in the newest Gadgets & Gizmos A’ Plenty company IPO and ride that surge!  

First of all, don’t go off investing for your future in the hottest new stock- we know better to consider investing in an index fund before you start playing around.

But yes, after you’ve tended to the other tax advantaged accounts, we’re headed back to the 401k.  Because the 401k is also an advantage to you.  Don’t forget whatever you are contributing to this account is another advantage to your end of year taxes.  

This is truly the best retirement investing order for artists in my opinion.  I understand if you’ve gotten this far, you’re probably very disciplined and thinking, “I’ve maxed out the Roth, I’ve maxed out the HSA- just let me buy 1000 shares of symbol UGC- Urine Good Company!”

Patience my fickle financiers.  There’s a reason we take advantage of all the accounts our tax law can offer us. 

As a means of basic example:

Eve Harrington takes home $100,000 in salary.

  • She contributes $7,200 to get that $3,600 match from her employer.  Free money.
  • She then takes $6,000 and contributes it to her Roth IRA. I Love A Roth.
  • Another $3,550 goes to her HSA. Eve is an investing powerhouse – look out Margo!

Eve has made $100,000, but will only be taxed on $89,250.

Because of these tax advantaged investments, if Eve pays exactly 30% in tax, she will pay $26,775 instead of $30,000.  That’s a savings of $3,225 just because she invested in the right places.  An extra $3,000+ back in Eve’s pocket.  An extra $3,000+ to reinvest and reap the rewards of compound interest.  She’ll scheme up something crafty to do with that money.

Finale Thoughts

This is the slow and steady way you will achieve financial freedom through smart and methodical investing.

And look, if you are disciplined enough to have made it through steps 1 – 4, you are so ahead of the game and are obviously on the right track.  But if you have access to these accounts and you aren’t taking advantage, well, you gotta get your head in the game.

And furthermore, this is considered the best investing order for retirement, but it’s quite possible you have other priorities in life also, and that’s ok! Maybe you want to buy a property in the near future. Maybe you’re focused on paying off student loan debt quickly. Everyone’s situation is going to be different.

Once you’re set up for success here then the last step we haven’t gotten to is investing in a taxable brokerage account.  You can set up this kind of account with most major institutions like Charles Schwalb, Fidelity, Ally Invest, etc. But the strategy remains largely the same, focus on the low-cost index funds and you’ll be on your way.

I hope today’s post was illuminating and helpful.  Now if you find yourself asking, Where Do I Go?  Just Follow The Wind Song.  Follow the steps, and implement the best retirement investing order for artists along the way.

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