a 7 week series
Dave Ramsey Baby Steps. Step 4
Week 4 is already here! This is a 7 week series in which I’m explaining Dave Ramsey’s Baby Steps.
These are the steps my own family is taking to rid ourselves of debt and live as freely as possible.
Need to catch up?
INVEST 15% OF YOUR HOUSEHOLD INCOME IN RETIREMENT
As Dave says:
“In this step, it’s time to get serious about retirement—no matter your age. This is when you take 15% of your gross household income and start investing it into your retirement.
Start by investing enough in your company 401(k) plan to receive the full employer match. Hey, that’s free money! Then invest the rest into Roth IRAs—one for you and one for your spouse (if you’re married). If your company doesn’t offer a retirement plan or match your contributions, then go straight to the Roth IRA. We get it. Investing is a boring subject. But when you see your money growing like beautiful weeds, it won’t seem so boring!
If you’re not too sure about what you’re doing, an investing professional can help you find the right funds and make sure you’re on the right track.” ~ Source: here
What does that look like for a typical household?
First, I want you to take a look at Chris Hogan‘s amazing explanation.
Also please keep in mind that this is the point where you are now out of debt and have 3-6 months of emergency savings put aside.
Now, first step is finding out if the company you work for has a retirement plan to begin with. Self employed peeps…like me…I’m getting to you in a few minutes. Hold tight.
If you have the option to choose a Roth vs. a traditional type of retirement plan, always chose Roth. You contribute after-tax dollars, so your money grows tax-free! This becomes important when you start withdrawing to use.
As Chris says:
“If your company doesn’t offer a Roth option, start by investing up to the match. From there, invest the rest in a Roth IRA. For example, if your company offers a 3% match, invest 3% in that program and then put the remaining 12% into a Roth IRA. If that remaining 12% would put you over the annual contribution limit for a Roth IRA ($5,500 if you’re under age 50, $6,500 if you’re 50 or older), contribute the maximum amount to the Roth IRA and then go back to the 401(k) to save the rest there.”
This is an example of a family who makes 60,000 gross per year.
Lets say wife makes 30,000 gross and hubs makes 30,000 as well. Just to make it easier 😉
Total gross household income: $60,000
Amount to invest (remember 15%): $9,000
Wife’s company offers a match of 5% into a traditional 401k. And we want the match (remember free money), therefore she invests 5% of their total gross income(so $60,000 x 0.05): $3,000.
Your company’s match does not count as part of your 15%. Think of it as extra moola.
Amount remaining to invest: $6,000
Roth IRA investment: $5,500(max you can contribute per year unless you are 50+ years old)
Remainder to invest: $500
Addition 401(k) contribution: $500
How do you choose the right mutual funds to invest in?
It’s been so long since I’ve worked for someone else that if I remember correctly…they give you options on how/where you want to invest your contribution. Dave suggests:
“Your employer-sponsored retirement plan will most likely offer a selection of mutual funds, and there are thousands of mutual funds to choose from as you select investments for your IRAs. Dave divides his mutual fund investments equally between each of these four types of funds:
- Growth and Income
- Aggressive Growth
- International” ~ Source: here
I feel as though being self employed offers a huge advantage to saving for retirement. You not only can contribute as an employee, but as an employer as well. From NerdWallet: A Solo 401k
- “In your capacity as the employee, you can contribute as you would to a standard employer-offered 401(k), with salary deferrals of up to 100% of your compensation or $19,000 (plus that $6,000 catch-up contribution, if eligible), whichever is less
- In your capacity as the employer, you can make an additional contribution of up to 25% of compensation
- There is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself
- The limit on compensation that can be used to factor your contribution is $280,000 in 2019″ ~ Source here
I know this is confusing and a bit overwhelming, but don’t let that stop you from starting. According to TheStreet.com, “A third of Baby Boomers currently in, or approaching, retirement age have between nothing and $25,000 set aside.” I find this terrifying.
What we plan to do is find a Smart Vestor Pro in our area when the time comes and make sure he has the heart of a teacher and go down the line at our options.
Have new information or a question? Feel free to leave a blog comment.