The likelihood that there will be “enough” in just your 401(k) or tax-deferred accounts to maintain a lifestyle you love in retirement is low—especially if you envision enjoying a work-optional lifestyle earlier than traditional retirement age. Your 401(k) has annual contribution limits, which means even if you max them out, you still may not be able to set aside enough to cover your needs.
Instead of relying only on a 401(k) or other savings accounts, setting clear goals and investing intentionally to offset the career risks associated with working in tech is critical. Investing, especially long-term investing, is the key to building wealth.
By developing an investment strategy now that incorporates your retirement timeline, you’re allowing yourself to create the future lifestyle you always envisioned. But it takes discipline, strategy, and a forward-focused mindset, which are all things we can help you with along your investment journey.
Maintaining a Long-Term Focus
Long-term or passive investing refers to buying and holding investments over a long period. It’s considered to be the opposite of active investing, which involves buying and selling regularly to beat market benchmarks and achieve the highest returns possible.
With long-term investing, your portfolio is meant to ride out short-term volatility and build wealth over time based on your risk tolerance, timeline toward retirement, and other factors. Just consider market performance over recent decades. Major global upsets like 9/11, the dot com bubble burst, the Great Recession, and the onset of COVID-19 created short-term market drops. But the market has consistently trended upward if we look back at the bigger picture. In fact, between 1997 and 2021, the U.S. stock market returned 9.8% a year on average.2
Long-term investing has several benefits that make it a more suitable option for tech professionals focused on managing risk. First, it takes emotion and impulsivity out of the investment selection process, which can cause investors to make regrettable and costly decisions. It also saves investors from attempting to time the market, which refers to predicting when certain investments will gain or lose value. Not only is this incredibly time-consuming and requires an advanced knowledge of the markets, but it is rarely, if ever, an effective strategy, and it’s risky – one wrong move could cost you significant returns over the long run.
Understanding the “Bucket” Strategy
When building a portfolio to get you to and through a work-optional lifestyle, you need a way to ensure your income needs will be met no matter the market conditions. The bucket strategy, for example, helps those preparing for retirement balance the need for stability and growth without taking on more risk than necessary.
While the exact makeup will look different for everyone, your portfolio will generally consist of multiple buckets designed to address your immediate, mid-retirement, and long-term needs. Each bucket consists of a different mix of assets and carries varying levels of risk.
The longer-term buckets, for example, may include more aggressive investments (such as stocks) since you won’t need to pull funds from them for quite some time. Should the investments within that bucket experience volatility now, they still have plenty of time to recover. But as time goes on and the timeframe shortens, the assets are reallocated accordingly to match your risk tolerance.
Addressing Your Equity Compensation
If you’re an employee in the tech industry (especially in the start-up space), it’s more than likely equity makes up a portion of your compensation package. Depending on your level of seniority and tenure with the company, you may have accrued a significant stake in your company. But it is possible to have too much of a good thing, and your portfolio may be over-concentrated in employer stock.
Diversification is a fundamental tenet of investing because having the proper ratio of asset types provides some protection during times of market downturn while still capturing potential long-term growth. You wouldn’t usually put a large amount of money into one stock, but when your equity compensation goes unchecked over time, that’s precisely what happens.
Rather than let your equity compensation define your portfolio, navigating your stock options and creating a plan that synthesizes your goals with investment opportunities is essential.
Special Considerations as a Tech Professional
As a highly compensated tech professional with a complex benefits package, you have unique advantages allowing you to pursue a work-optional lifestyle. But along with those advantages are some drawbacks or considerations to consider when building your portfolio and managing possible risks.
Burnout, for example, is a serious concern that results from chronic work-related stress. Around 46% of women and 38.2% of men in tech are at a high risk of burnout.1 Burnout can cause cynicism or apathy toward your work or employer. It can also lead to quitting and, in some cases, pivoting careers altogether. If that could be in your future, you’ll want to consider how leaving the tech industry may impact your financial goals.
Need Help Building Your Portfolio?
If you’re now recognizing the importance of building a long-term focused portfolio, you’ll want to work with a professional who understands the ins and outs of your unique financial landscape. We specialize in helping tech professionals make the most of their equity compensation and other benefits while preparing to enjoy a work-optional lifestyle.
Feel free to reach out anytime to learn more about what we do and how we can help.
Sources:
1 Tech workers face a ‘burnout crisis’ unless employers act now