Over the years, I’ve read and learned so much about how to pay down debt, budget well, and save save save. One popular approach is Dave Ramsey’s seven baby steps, but then I get to step #4 about saving for retirement, and it gives me pause.  There should be other sub-steps just in step #4 alone!

There are so many ways to save for retirement, but where to begin? Do we throw our money into a traditional savings account, play the stock market, invest in mutual funds? Then there are the Traditional 401k’s, Roth 401k’s, Traditional IRA’s, and Roth IRA’s… it’s enough to make my head spin! So… I decided to go down the rabbit hole and investigate.

Besides a discussion with our financial advisor, one of my favorite pastimes is reading forums on reddit, specifically the personal finance subreddit, then filtering by retirement. Reading through crowdsourced opinions helps me consider various perspectives with something as personal as retirement planning. It’s also nice that Mr. Heels works in Finance, and can help legitimize the bajillion questions and scenarios I throw at him.

My obsessive forum reading was what led me to this handy dandy visual that helped us figure out our approach to retirement planning:

retirement_planning_info

To dig a little deeper, this graphic is recommending we follow these steps in order:

1) Build 3-6 months worth of expenses in the form of an emergency fund.  This is cash that can be easily taken out of an account and used at a moment’s notice because, well… life happens!

2) Contribute to your company’s 401k up to the employer match.  If you have this option, take full advantage!  It is essentially free money!

ADVERTISEMENT

3) Pay off debt starting with those with the highest interest rates first.
– This is slightly different from Dave Ramsey’s advice of paying off the accounts with the lowest amounts of debt first. Ramsey recommends that approach for psychological reasons, but it’s more practical to pay off debt with highest interest regardless of debt totals.

4) Contribute to an IRA (roth or traditional or a combination of the two) up to the $5,500 max contribution limit.
– There are some rules to investing in an IRA, such as the fact that you can only invest earned income (so if you only earned $2,000 a given year, you can only invest a max of $2,000 into an IRA).
– However, even if you don’t have earned income, you can still contribute to an IRA as long as your spouse has enough earned income to cover both of the contributions (so if they earn at least $11,000).
– Also, couples earning more than $191,000 are ineligible for Roth IRA contributions.

5) Put more back into your 401k plan on top of the employer match.
– As of 2015, an individual can contribute a max of $18,000 annually into a 401k.

6) Other savings/investments

These steps make a lot of sense to me. Step one is important because we want liquid money on hand when sh*t hits the fan. Step two makes sense because if your company is going to match your contribution, you are already getting 100% of your return just by that step alone! Then, of course we need to pay down debt in order to stop throwing money away in the form of interest.

Step four tells us to contribute to an IRA. Here are some reasons why you’d want to contribute to an IRA before investing more into a 401k. I also thought this was an interesting discussion. Finally, once you’ve exhausted all tax-advantaged retirement plans, you can invest the rest of your money into savings and other investments.

Experts also recommend setting aside 15% of all earnings per year for retirement. This percentage is often up for debate though, and there are plenty of retirement calculators out there to help determine how much you should really save depending on various factors given where you’re at in life.

If you want to learn more about all things finance-related, the Khan Academy videos are a great place to start!  They have a whole section on retirement accounts.

Do you have a game plan for retirement?