Magazine

Ask Us Your Money Questions. We Answer Them Here. (Part 3)

By Ellevest Team

This list of questions from our community picks up where the second part left off.

Jump to a question:

Why do you recommend continuing to invest when my balance is going down?
Should I pay off credit cards or save for emergencies?
What should I do with my short-term investment goals?
How should I take advantage of the temporary federal student loan policies?
Is now a good time to go to grad school?
My job security is uncertain. Should I take a new job with a pay cut?
Should I take out a car loan or dip into my retirement account?
Should I pay more or less on my student loans while the interest is suspended?
Does the Fed’s interest rate change affect my student loans?
Should I refinance my private student loans?
Is now a good time to refinance my house? And should I borrow extra to build an emergency fund?
How can I make my Ellevest portfolio contain more or less exposure to the stock market?
If stock prices are dropping, why are bond prices dropping too?
Is gold a good investment?
Is now a good time to invest a lump sum?
How long does it take the market to recover from hits like this?
Is now a good time to roll over my 401(k)?
Should I pause my 401(k) contributions, or keep going to take advantage of my employer match?
Should I move my money from stocks to bonds?
Should I use my retirement fund to pay off my student loans?
Is it a good time to invest in cruise lines?
Should I continue with the process of buying a house?
How should we start investing for retirement, as mid-lifers without savings?
Would I owe taxes if I were to make money investing?

We’re still not done with questions! Read part four here.

Why do you recommend continuing to invest when my balance is going down?

Question: I’ve seen in your emails and articles that this can be a good time to buy because stock prices are lower in this current market. However, my account is showing that I’ve lost money. My balance had been up before the coronavirus situation became more widespread.

Would you still recommend that I put more money into my account now? If so, why is it good to buy new stocks if I’m still showing that I’m operating at a loss? It’s hard to understand why the general advice is to invest more and buy more now because eventually the market is going to increase — from my perspective, it looks like putting more money in would just be adding more money to a fund that is essentially decreasing.

Good question! The value of your investment account equals the value of all the individual investments you own, added together. As the investments you own gain (or lose) value, the balance of your account overall generally goes up (or down).

When the stock market “falls,” that means most stocks on the market have lost value — and since a diversified investment portfolio generally includes lots of different stocks, that is what causes your portfolio’s balance to go down. But here’s the thing: If you leave your money invested and the markets go back up (aka the value of those stocks rises again), then the value of your investment portfolio would go back up, too.

When the market is down, that means it costs less to invest in the stock market. So if you continue to invest your normal monthly amount, you will be buying more shares at once. Then, if the market goes back up, you’ll own more stocks than you otherwise would have. Here is a more in-depth explainer on that.

That’s why we recommend keeping your money invested, even (or maybe especially) when the markets are “down.” The best response is to invest regularly, for the long term.

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Should I pay off credit cards or save for emergencies?

Question: With all this financial uncertainty, should I continue to pay off my credit card debt while also stockpiling as much cash as I can? Or should I only pay the minimum payment and save ALL my cash? I want to make sure that if I lose my job in the future, my monthly expenses (including credit card payments) are as low as possible — so that’s my thinking around paying now, while I still can. I’m about halfway to having a 3-month emergency fund and trying to grow it quickly now while I’m still employed. What do you think?

I would definitely continue to focus on paying off any high-interest debt you have, like that credit card. Anything with an interest rate over 10% is the highest priority. If it has an interest rate between 5% and 10%, you still want to focus on paying it off, but you can work on other goals too — like that emergency fund.

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What should I do with my short-term investment goals?

Question: I understand that I should leave my retirement funds with Ellevest and my employer in place. However, I’m now very concerned about the short-term investment goals I have with Ellevest. Some of these portfolios hold money I was planning to use within the year or next year. I’ve lost a lot, and I don’t know whether I should withdraw it or leave it untouched.

From Rachel Sanborn Lawrence, lead financial planner: Generally, we recommend keeping any money you’re saving to use in the next year or two in a guaranteed place, like a savings account. But if you already invested it and your account dropped, that’s tough.

If you really need the money now, you should of course withdraw it. Otherwise, I might recommend leaving it invested as long as you can — that gives your money the chance to benefit from any recovery the market might make before you need it. That being said, it’s impossible to know whether markets will rise or fall in the short term, so if you’re extremely nervous, you could also choose to withdraw it.

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How should I take advantage of the temporary federal student loan policies?

All interest on federal student loans is suspended for now, and you can pause payments for the next two months without penalty.

So if you have high-interest debt, and / or if you don’t have an emergency fund saved up, you could contact your student loan provider and request forbearance for two months — then put that money toward your debt or in your emergency fund instead, if that makes sense for you and your financial situation.

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Is now a good time to go to grad school?

From Stephenie Girard, lead career coach: There is certainly strong opinion supporting the idea that going to grad school during a recession can be a wise decision. That being said, everyone should explore their “why” before moving forward with a significant commitment like that. Also, it’s important to be confident that the graduate school path aligns with your long-term goals. Simply being in a recession may not be (and probably isn’t) enough reason to constitute furthering your education — make sure you see clearly how this decision supports your long-term career progression.

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My job security is uncertain. Should I take a new job with a pay cut?

Question: I was informed a few months ago that my position was going to be eliminated at some point in time this year. I haven’t been given a definitive timeline, and I ramped up my job search as quickly as possible. I have a potential opportunity that would result in a potential $20,000 pay cut and probably knock me slightly off my advancement path. If that offer comes up, do I take it?

From Stephenie Girard, lead career coach: Thank you for reaching out. I am so sorry you’re facing such challenging decisions in these times of uncertainty.

We’re in a time where it is so important to examine the opportunity risk in a decision-making process. I suggest having conversations with those you trust, including your partner and others on your “personal board of advisers” to gain the perspective, insight, and wisdom you’ll need to make these choices for yourself. Also, check in with your own gut instincts. Your intuition should be a resource and north star in these moments.

I also encourage you to be open to the reprioritization of your goals right now. When we’re clear on our values, we can change our priorities and still feel that our decisions — though difficult — make sense. I’ll give you an example from my life: My values are family, career progression, flexibility, helping others, and health. Right now, I might choose to elevate family and helping others over my exercise routine. I know that exercise is very important for me, but right now I choose to focus on those other values — serving others and my family — rather than doing a barre class at 8 AM. That doesn’t mean that I won’t eventually prioritize my exercise routine in a few months, but I’m setting priorities based on those values that are most important for my life right now.

I invite you to be gentle on yourself. Keep a mindset of abundance and trust that your strengths, vision, and intentions will not be diluted if you choose one path vs. another.

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Should I take out a car loan or dip into my retirement account?

Question: I recently moved to LA and have been unemployed for a few months. I have about $3,000 in my checking account and $40,000 in a retirement account.

I think I need a car. I just can’t get around LA during the corona mayhem on public transit, Ubers, or relying on friends for a ride. I’m looking at getting a certified pre-owned vehicle, something very basic and reliable that I would trust not to be a lemon.

Should I finance the car? Since I’m unemployed, I’m not confident I can get a good interest rate. Or should I just withdraw ~$20,000 from my retirement account and pay cash?

From Rachel Sanborn Lawrence, lead financial planner: This is a tough one. We definitely don’t recommend dipping into retirement funds whenever it’s possible to avoid it. Taking money out of a retirement account when you’re too young comes with a few huge drawbacks. First, you’ll probably have to pay income taxes on that money at whatever your current income tax rate would be. And even though the recent stimulus bill waived the penalty fee for early withdrawals up to $100,000, you’d be locking in any losses on your investments you might have experienced recently.

I would suggest shopping around to see what kind of financing you can get right now. Auto loans are actually some of the easiest to get, even if you aren’t an ideal borrower.

Get quotes from the dealer and from a bunch of other places, like banks or credit unions. If you get all your quotes all within a period of two weeks and then apply for one of them (if you decide to do that), then all of those inquiries should be treated as one inquiry on your credit report.

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Should I pay more or less on my student loans while the interest is suspended?

Question: What’s the best way to take advantage of the student loan interest waiver? I’m paying off one large credit card debt and one student loan each month. I usually pay a lot toward my credit card bill. Should I pay more toward student loans during this waiver period so that it goes straight to the principle?

Great question! Usually credit card interest rates are much higher than student loan rates, so if this is the case for you, I’d stick with paying down the cards.

Also, given the announcement that federal student loans won’t be due at all for the next couple months (if you request it), now might be a good time to throw the extra payments at the credit card debt to help make faster progress. To take advantage of the new pause, you’ll need to request forbearance from your lender.

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Does the Fed’s interest rate change affect my student loans?

If you have federal student loans with fixed interest rates, those rates were set by Congress in the year you took the loan, so you wouldn’t see a reduction in your interest rate. But if you have any loans with variable interest rates, you could see a drop in your interest rate.

Variable rates are most common with private student loans, while federal loans tend to be at fixed rates. If you aren’t sure whether your interest rates are fixed or variable, you can check with your loan servicer.

If you have private loans, you might want to check in with your loan servicer to find out about opportunities for locking in or refinancing to a lower rate. It never hurts to ask! If they say no, you could also shop around to see if you can get a better rate refinancing elsewhere. (We don’t typically recommend refinancing federal student loans — they have a lot of benefits.)

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Should I refinance my private student loans?

Question: I took out a private loan during my undergraduate years that has a high interest rate. I’m in graduate school now, so my loan payments are currently deferred. Do you suggest that I work on paying off this high-interest debt, given the times? Or will I be OK to continue holding off until I’m out of school and maybe refinance my loans then?

If you already have private student loan debt, now could be a great time to see if you can refinance it and get a lower interest rate. Doing that could potentially save you thousands of dollars in the long run. You can often request quotes from refinancing companies to see what kind of rate they’ll offer you.

As long as the interest rate on your existing loans isn't more than 10%, now may be a good time to keep them in deferment. That way, you can put any extra cash you may have into an emergency fund to help tide you over through tough times — or so you can use it to pay for your day to day needs if you're not currently earning income. Double-check any refinancing loans you’re considering to make sure they have deferment options. Then you can refinance and then immediately go back into deferment.

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Is now a good time to refinance my house? And should I borrow extra to build an emergency fund?

Question: Is it a good time to refinance my mortgage at a lower interest rate? Would you recommend borrowing extra during that refinancing for a rainy day fund or eventual home improvements?

From Rachel Rabinovich, financial planner: Since the Federal Reserve recently cut interest rates to nearly zero, this could be a great time to refinance your mortgage. You might be able to lock in a historically low rate with your mortgage lender and save a lot of money in the long run.

Typical guidelines say that the best time to refinance is when you’re offered rates that are 1–2% below what you’re paying now. But it could be worth looking into even if you won’t save quite that much — if you can find a lender that will refinance with very low closing costs. Some lenders let borrowers do a “streamline refi” with little to no closing costs just to keep the business.

Refinancing is one way of funding some of your financial goals — like that rainy day fund or your home improvements. This would involve a “cash-out refinance,” which replaces your existing mortgage with a new home loan that’s worth more than you currently owe on your house.

This could be a good way to pay for some home improvements. I would just think carefully about relying on the equity in your home to meet other financial needs — check your budget to be sure that your new mortgage wouldn’t prevent you from comfortably affording your living expenses.

I would generally not borrow the money for emergencies — then it would be costing you interest while sitting in a savings account earning nothing. I recommend trying to save for emergencies the old-fashioned way — a little at a time as you can. In the meantime, you could consider taking a home equity line of credit instead and using that if you need to.

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How can I make my Ellevest portfolio contain more or less exposure to the stock market?

The investment portfolio Ellevest builds for each of your goals is tailored specifically to your timeline — generally, the longer you have to invest, the more exposure to stocks we’d put in your portfolio. Our recommendations take downturns like this into account, so we recommend sticking with your plan even during times of volatility.

That being said, if you would like to adjust the exposure to stock in your portfolio, you could adjust the time horizon of your goal — longer if you want more exposure to stocks, shorter if you want less. Feel free to try different time frames to see how it impacts your portfolio.

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If stock prices are dropping, why are bond prices dropping too?

Good question. You’re right that typically, stocks and bonds move in different directions — that’s because investors who are nervous about stocks might choose to invest in bonds instead, which are often less risky.

But in very short time periods, it’s possible for non-correlated assets (like stocks and bonds) to trade in the same direction. That’s happening now because losses in the stock market are forcing some investors to sell bonds in order to access cash. In the past, situations like these have been temporary, and the correlations between stocks and bonds have eventually returned to normal.

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Is gold a good investment?

Question: Is gold a good investment? If so, is mining stocks or actual coins better? Is now a good time and how much is worthwhile to buy?

At Ellevest, we don’t invest our clients’ money in individual investments — instead, we use exchange-traded funds (or occasionally mutual funds, in certain portfolios), which are baskets of many different investments put together. There are a lot of benefits to funds, and you can read more about that here.

That being said, if you want to buy specific investments like gold, that’s up to you — we just strongly recommend that you don’t use any money that you need. Investing like that can be risky, so only use funds that you wouldn’t mind losing in case it doesn’t work out.

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Is now a good time to invest a lump sum?

Question: I usually try to invest the maximum into my Roth IRA all at once. Would now be a good time, since it’s just one big “investment” and I’ve always done it that way?

We do recommend investing even when the market is down when you’re investing for the long term. But rather than depositing a lump sum, we like to recommend smaller increments over a time period, aka dollar-cost averaging. This allows you to invest without having to guess when the best day to do it might be. If you’re investing a little bit consistently, you’ll be in on some up days and some down days, and pay an average price over time.

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How long does it take the market to recover from hits like this?

Question: Generally how long does it take the market to recover from hits like this? I have a few mid-term investment accounts open, and I’m wondering if I should transfer that money out.

Historically, the average recovery time has been four years — but it ranges by a lot, and every downturn is different, so it’s difficult to make comparisons.

Generally, the worst thing you could do would be to withdraw your money after the market drops. Then you will have “locked in your losses,” as they say, and you won’t give your portfolio the opportunity to go back up if the markets go up. That’s why we recommend keeping your money invested, even (or maybe especially) when the markets are “down.” The best response is to invest regularly, for the long term.

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Is now a good time to roll over my 401(k)?

Question: I had some money in a previous employer 401(k). I am with a new employer and haven’t transferred the funds over. Is now a bad time to do that? What makes the most sense given the market?

Consolidating your retirement accounts into one place can give you a clearer picture of how all your assets are invested. That can make it easier to create a specific plan designed to get you to your target retirement amount, like we do for you at Ellevest.

Generally, we recommend rolling your old 401(k) over if it’s going to help you make a plan that works for you (and then stick to it until retirement!) — without worrying too much about the ups and downs of the investments along the way. So if you’d like to roll over your old 401(k) to your new employer’s 401(k), reach out to your new employer’s plan administrator for more info about how to get started.

Just keep in mind that when you initiate a 401(k) rollover, there might be a delay between the time when some (or all) of your funds are withdrawn from your old account and when they’re deposited in your new account. This could make it tempting to try to time the market, waiting for them to be higher before you deposit the money. Don’t do that. First of all, there’s a 60-day time limit to complete your rollover, and if you wait longer than that, you’ll incur penalties. Second of all, trying to time the market is extremely risky and generally doesn’t work.

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Should I pause my 401(k) contributions, or keep going to take advantage of my employer match?

Question: Currently, I put 2% of my income into my 401(k) and my company matches 2%. However, my 401(k) is currently losing money significantly. Should I pause my contributions (and lose the employer match) or keep it going and maintain the employer match? I also have a student loan that I could transfer my 401(k) payments to so that I am still improving my financial standings.

We generally don’t recommend changing your plans to invest because of the market volatility. We believe investing regularly, through up markets and down markets, is generally the best plan for a long-term goal.

Some history: if you invested in the stock market in 1929 (right before the Great Depression) and then stopped your ongoing investments when the depression started, it would have taken you more than 25 years to recover your investment. If instead, you had invested at the beginning of every year after the depression started (buying into the market at lower prices), it would have taken you less than seven years to recover.

The story is even better for 2008: If you had invested at the market’s peak in late 2007 and then stopped when the market dropped, you’d have recovered in about five years. If you’d invested regularly throughout the recession, you’d have recovered in less than two years.

As long as you have more than a couple of years until your goal, we wouldn’t recommend stopping your investing plan.

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Should I move my money from stocks to bonds?

That depends on how long you have to invest. Stocks have historically offered the possibility of higher returns, but that comes with higher risk. Bonds returns are generally lower, but they can have lower risk compared to stocks. The longer your time horizon is, the more exposure to stocks you can generally “afford” to have in your portfolio.

The investment portfolio Ellevest builds for each of your goals is tailored specifically to your timeline. We recommend following that plan, even in times of volatility.

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Should I use my retirement fund to pay off my student loans?

Question: I’m in my late 20s, and I have $40,000 in student debt at a 5.4% interest rate. I have $70,000 in my retirement fund. Lately, I’ve been considering using my retirement fund to pay off my student loans, since I would still have about $30,000 left over and will be debt free after that. I’m not sure of the pros and cons, and I would love some advice.

We don’t generally recommend using your retirement money at all before retirement. The recent stimulus bill waived the 10% penalty on early withdrawals (up to $100,000), but you’d have to pay income taxes on the withdrawal as if it were income to you this year. This means you’d be losing anywhere from 10–40% of the withdrawal amount to penalties and taxes.

Compare that 10–50% to your 5.4% interest rate on your debt, and you can see this probably isn’t a good move. I know student loans can feel overwhelming, but over the past 91 years, the stock market has earned an annual average of 9.7%.

If the loans are really weighing on you, you use any wiggle room in your budget to pay extra on them so that they’re paid off more quickly. But we generally do not recommend using your retirement money to pay them down.

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Is it a good time to invest in cruise lines?

At Ellevest, we don’t invest our clients’ money in individual stocks or industries — instead, we use exchange-traded funds (or occasionally mutual funds, in certain portfolios), which are baskets of many different investments put together. There are a lot of benefits to funds, and you can read more about that here.

That being said, if you want to buy stock in cruise line companies, that’s up to you — we just strongly recommend that you don’t use any money that you need. Investing in individual stocks can be risky, so only use funds that you wouldn’t mind losing in case it doesn’t work out.

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Should I continue with the process of buying a house?

Question: I’m in the process of buying my first house (!!) and I’m wondering if I should totally abandon the whole thing or continue through with it? I was pretty young during the 2008 financial crisis, so I’m unfamiliar with the ins and outs of big purchases during financial uncertainties. Do you have any insight into what the real estate market looks like? Or general advice on big purchases during a time like this?

If you’re already in the process of buying a home right now, you should be OK to continue with it as long as your financial fundamentals are covered. If you’re able to put 20% toward a down payment, still have three to six months’ of take-home pay in an emergency fund left over, are able to comfortably cover your expenses with the new mortgage payment, and plan to stay in the home for at the very least three to five years, you are probably good to go.

Since the Federal Reserve recently cut interest rates to nearly 0%, you may even be able to lock in a historically low rate with your mortgage lender, which could save you a lot of money in the long run. If they already “locked in” a rate for you, you can still push back and ask for a new rate quote, just to make sure you're getting the best possible deal.

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How should we start investing for retirement, as mid-lifers without savings?

Question, from a married couple: If we wanted to invest, where on earth do we start? We’re mid-lifers with no retirement savings. We started our own business eight months ago, in the hopes that once we are turning a healthy profit, we can make up for lost time. It’s been a successful business venture so far, but I’d like to be ready with a plan.

If you don't have any savings yet, the very first place to start is with building up three to nine months’ worth of average (reasonable, not bare-bones) expenses to help you get through any downturn in your business or life emergencies. We usually recommend three to six months’ worth, but you might want more since you’re self-employed. Save this into a liquid (easy-to-access), guaranteed account like an FDIC-insured savings account. Celebrate the milestones along the way — hitting one month, then two months, and so on. Maybe treat yourselves to a (reasonably priced) dinner! It'll help keep your positive momentum going.

When you’re on track with that, you can each get started with a retirement savings account. This may actually be a good time to get started investing incrementally, while the market is down.

There are a number of retirement savings accounts that you can choose from as small business owners. Ellevest offers Traditional IRA, Roth IRA, and SEP IRA accounts, which both of you could open in your own names. If you’re investing your money via one of these accounts, Ellevest would choose and manage the investments for you, based on your own timelines and what you think you’ll need during retirement.

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Would I owe taxes if I were to make money investing?

Question: One thing that really worries me about investing is owing taxes at the end of the year. I know I need to be investing and I am doing it regularly each month, but I'm almost scared to make money because I'm terrified of getting to the end of the year and owing thousands of dollars in taxes on the gains I've made. I can’t afford that. It is scary and really discourages me from investing, and it feels like that’s one of the reasons that wealthy people tend to have a huge leg up.

Good questions! The way taxes on investments work really depends on the type of investment account you use for investing. If you have a traditional IRA (individual retirement account), you’d only owe income taxes when you withdraw the money — for most people, this is usually once they’re retired. If you have a Roth IRA, you put money into it that was already taxed, so you wouldn’t owe taxes when you're ready to withdraw that money, either.

But from your question, it sounds like you’re investing into a taxable investment account (which is also sometimes called a “brokerage” account). In that case, you’d typically pay taxes on any money that you make from your investments if you sell them, or on any dividends or interest that the investments may pay you.

At Ellevest, we manage clients' investment accounts in a way that attempts to minimize the tax impact for you. We also consider the potential impact of taxes when we forecast your investment goals, so that's already been accounted for in your target number.

Plus, if you do end up making money on your taxable investments and have to sell them for any reason, you might choose to sell a little extra to help pay the taxes so that it doesn't have to come out of your day-to-day cash flow.

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We’re still not done with your questions! Read part four here.


Disclosures

Calculated by Ellevest using data from Yahoo Finance.

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You may or may not have noticed that we linked to https://www.credit.com/ for information about auto loans. FYI, Credit.com (“Solicitor”) serves as a solicitor for Ellevest, Inc. (“Ellevest”). Solicitor will receive compensation for referring you to Ellevest. Compensation to the Solicitor will be $10 per membership activated. You will not be charged any fee or incur any additional costs for being referred to Ellevest by the Solicitor. The Solicitor may promote and/or may advertise Ellevest’s investment adviser services. Ellevest and the Solicitor are not under common ownership or otherwise related entities.

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Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Forecasts or projections of investment outcomes are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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Ellevest Team

The Ellevest team is working to help women reach their financial and professional goals.