Once you’ve completed Baby Step 3—saving three to six months of expenses for emergencies—you can dive into your next Baby Step! Your debt has been eliminated, your cash flow is positive and you have an emergency fund. You are free to save at least 15% to retirement accounts.
The common question in saving for retirement is what’s the best place to save? Dave Ramsey suggests (and we agree) that you start by saving in your 401k with your employer if you receive an employer match to your account. This is essentially free money that your employer gives you as an incentive to save for retirement. Many employers also have a Roth 401k available for investment. We suggest also taking advantage of this plan if it is available.
Once you have contributed to get the match in the 401k, it’s suggested to start funding a Roth IRA for you and your spouse. The maximum contribution per person is $5500 so this will allow you to contribute $11,000 per year to these accounts.
Lastly, if you have maxed out the Roth IRA’s, we advise contributing the remainder of the 15% back to the 401k.
Retirement accounts should be invested in stock mutual funds. This gives the greatest chance for growth over time. Retirement accounts are not short-term investments, so volatile market movements shouldn’t be a concern for the long-term investor. The best investors have a diversified mutual fund portfolio, investing in both U.S. and international stock comprised of small and large companies.
In short, remember these points:
- Take advantage of your employer match. Start investing in your company 401k.
- When you hit the maximum employer match, contribute to your Roth IRAs.
- Once your Roth IRAs are maxed out, go back to funding your 401k.
- Invest in globally diversified stock mutual funds with both small and large companies.
As a Dave Ramsey Smartvestor Pro, Stewardship holds close to this baby step, and wants to help you accomplish your retirement goals. Set up some time today to talk with our Smartvestor Pro team to help you implement your retirement savings.
Jeremy Sharp is the Director of Financial Planning at Stewardship Financial. Jeremy loves helping people figure out ways to organize their financial life and make better decisions with their money. Jeremy and his wife have two boys and is an avid fan of New England sports.