Personal Finance 101 - Saving For Retirement
This is the sixth part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.
It has taken me awhile to get to Baby Step #4 in my Dave Ramsey series. This is mostly because I don’t understand a lot of it. Don’t get me wrong, I understand the step:
#4 - Invest 15% of your income into retirement savings
Understanding it - easy-peasy, Japaneezy. Knowing the best way to do it - not so much. Not by a long shot. I’m still researching it for our family, and I’m simply not at a place where I’m confident enough to write about the various methods of accomplishing this step.
I understand the importance of doing it, the why behind the what. I want to retire with my hubby where we’re not a burden to our kids. We have no desire to throw in the metaphorical towel of life and kick back in Miami, we want to bless those around us doing whatever we’re called to do, no matter our age or health. This will take money. Not a lot, hopefully, but enough.
Here’s the nuts and bolts of Dave’s advice:
What we teach is to invest 15 percent of your pre-tax income for retirement once you get to Baby Step Four. You should start with contributions to the 401(k), putting in just enough to get the company match, then max out the Roth IRA. If you get no company match, then start retirement investing with the Roth. The reason is that a Roth IRA grows tax-free and is a better option than the 401(k), which grows tax-deferred. It’s a three-step process; first contribute what your 401(k) matches, then the Roth, then go back to the 401(k) and add until you hit 15 percent. Don’t get too enamored with the full-service investing stuff … just do basic mutual funds.
Dave is into mutual funds more than any other type of investment (except possibly real estate, but only when bought with 100% cash). He recommends only mutual funds with at least a 10-year track record of doing well, averaging around 12% (which some people out in the blogosphere balk at, saying 8-9% is more realistic). With a somewhat predictable inflation rate of about 4%, you’re ideally looking for an 8% return on an investment (12% - 4% = 8%).
Bankrate has a good calculator to help you determine your basic retirement needs. Here’s a snapshot from their site:
In this example, if you’re 30 and would like to retire at 65 with an annual income of what would be $30,000 today, with a conservative 8% rate, you’ll need to save a total of almost 2 million dollars. That would be around $132,000 invested.
Now if you’re following Dave Ramsey’s Baby Steps, you wouldn’t be on this step until you’re debt-free and have 3-6 months of living expenses in savings. So even if your company does a 401(k) match, he recommends stopping all retirement contributions until you’ve checked these steps off. That’s scary to most people, which he says is a good thing, lighting a fire under you to get the ball rolling.
We personally are not yet on Baby Step 4, so technically, we shouldn’t be contributing to retirement. But we are (shhh… don’t tell Dave). But it’s not much - 8% right now. Of course, we’ll definitely bump it up to 15% when we’re officially on this step!
Quite honestly, I don’t know much more about investing. But there are lots of good reading and resources out there.