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:
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!
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?
blogger / wonderful cherry / 21628 posts
Great post! Saving for retirement is so important. This is very similar to what Mr. P and I are doing.
pear / 1614 posts
Awesome summary! In my opinion 15% is very low and it is very worthwhile to look at areas of spending you can cut if more than that seems unachievable. Thanks for this post!
clementine / 812 posts
Nice post! It’s important to note that many companies offer a Roth 401(k).
grapefruit / 4988 posts
Great post, we’ve been thinking about this stuff alot recently.
grapefruit / 4187 posts
This post is a big reminder to talk to a financial planner finally!
blogger / grapefruit / 4836 posts
That’s a great graphic
I’m a pretty firm believer in Dave Ramsey’s plan, even if it doesn’t seem practical 
but the most important thing is that debt gets paid off and retirement is savet for…the rest is just details 
thanks for sharing!
blogger / eggplant / 11551 posts
@shellio: I agree, 15% seems low to me too! But some is better than none, so it seems like a realistic goal for most to shoot for.
@Mrs. Coral: Yes! I briefly mentioned it in one of my opening paragraphs, but didn’t want to dole out too much financial advice. My employer offers a roth 401k with matching and I’m glad they do!
@Mrs. Lion: Completely agree that regardless of how you do it, any debt that can be shaved off is a good thing! I only mentioned the differences between the graphic and Ramsey to help clarify why the graphic made the recommendation it did. Didn’t mean to bash on Ramsey at all. I’m a fan of his!
kiwi / 511 posts
Ahh the budgeting it is the bain of my existence. We have a couple of extra “funds” that we segregate money into. We have a savings for the house for big projects we know we want to do (example central air, repair retaining walls etc). We have a “big trip” savings to take our oldest back to Russia when he is 16 or 17.
And for our emergency fund we actually keep closer to 8 months of savings. Just seeing the economy and how the jobs numbers are consistently revised downwards significantly after the announcement it felt better for us. (All jobs numbers tend to be revised after announced but these past few years the revision downward has been a lot higher so I don’t feel as confident in the availability of getting jobs. I am also closely watching jobs with H1B visas such as in California Edison and CT, I am considering revising up to closer to a year.)
And yeah retirement fun stuff.
wonderful pomelo / 30692 posts
Funny timing of this post! My husband and I are just starting to think about our financial plan for the future. One thing that we have to think about is when we want to retire. If we decide to retire early, we’ll actually need more in investments/savings to offset expenses until we can draw from our 401ks and IRAs. And deciding whether to put our money in a traditional 401k vs a Roth 401k is another thing we have to think about!
coconut / 8430 posts
@Mrs. High Heels: Great post! This is a topic that I am really passionate about as well.
One thing to add to step 4 that is relevant to this community is the Spousal IRA. http://www.investopedia.com/terms/s/spousal-ira.asp
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.
blogger / eggplant / 11551 posts
@sunny: Great point about the spousal IRA. I’ll edit the post to include that because I think it’s important to note!
honeydew / 7444 posts
Great post! As someone who looks after plan design and management of our company’s pension plans, you’d be amazed by how many people don’t take advantage of company match.
I think people also need to realize that 15% savings rate may be a reasonable amount when you’re young. If you haven’t saved much, that savings rate goes up as you get older!
blogger / pineapple / 12381 posts
This is a wonderful post. We adhere to this pretty strictly, except that I’ve read in several places that we should be actually saving 20% of our income per year for retirement–especially if you got a late start like I did. When you go to school for as long as I did, you’re really delaying your nest egg. So for late bloomers, 20% is much more realistic.
Thanks for this post. It’s great!