Saving for retirement doesn’t need to feel like you’re going over Niagara Falls in a barrel. Start small, like your emergency fund, and then move down the waterfall one bucket at a time.
1. Emergency fund: Keep enough cash to cover 3-6 months of living expenses in a savings account. Use an online bank’s savings account to get a higher interest rate.
2. Company 401k: Contribute the percentage of your pay needed to get the company match. That’s free money you don’t want to miss out on, but make sure you understand your company’s match formula and requirements for service and vesting.
3. Pay Down Debt: If paying down your high interest loans first seems too daunting, try Dave Ramsey’s Snowball method to help you gain momentum with paying off debt.
4. Max out your Roth or Traditional IRA: You can contribute to a Roth IRA or Traditional IRA annually, but not both. Under 50, you can contribute $5,500 annually if under 50. Over 55, you can make an extra $1,000 “catch up” contribution. Be aware of Roth IRA income limitations and Traditional IRA deductibility rules.
5. Max out your 401k: You can contribute up to $18,000 of your pay annually if under 50. Over 50, you get an extra $6,000 “catch up” contribution. If you can’t max out your contribution, try to increase your contribution by one percentage point each year.
6. After-tax Savings: Congratulations, you’ve reached the end of the waterfall. Consider investing any extra savings you have in a diversified portfolio.
Editor's Note: This blog post is part of the July 2017 edition of Odyssey NexGen Newsletter. Curious about Odyssey's NexGen program? Email [email protected] to learn more.
Reviewed & approved via C2C by BT 7/11/17