Setting my Savings Priorities

18286914449_181cc09206_zIn a previous post, I had some fun with Betterment’s new RetireGuide. After running my numbers, the exercise made my think about how I want to handle my retirement and that I need a more specific plan put in place.

One step in the plan I’ve been pondering is the best way to prioritize my savings. And I don’t mean how to shift my priorities to save more; I’m talking about prioritizing which accounts to fund and in what order. At the end of RetireGuide, it offered me this recommendation:

  1. 401k up to employer match
  2. Max out my Roth IRA ($5,500)
  3. Go back to funding my 401k & other taxable accounts

I’ve seen this recommendation in many financial articles and blogs, but I’m currently not doing it. Why not, you ask?

  1. Contributing to my 401k is easier, since the funds come out of my pay before ever hitting my bank account. I don’t see it or deal with it and am not tempted to spend it!
  2. 401k contributions are pre-tax and reduce my taxable income for the year, so my not go whole hog?!
  3. My mindset has always focused on the 401k as being the best retirement savings tool, but I am now realizing that it is one in a toolbox of many.

I understand that it’s a good idea to balance out my pre-tax and post-tax retirement accounts, as I’m not sure whether I’ll be in a higher or lower tax bracket upon retirement. I think the main factor for me right now in making this decision is when I will need the money. If I chose to go with my “mini-retirement” plan, I’ll likely need to access funds before age 59 1/2. If I opt to follow a plan that is more along the lines of “early retirement”, I could also need some of that money before my 401k would allow without penalty.

So being the brain surgeon that I am, it seems obvious that I should restructure my savings to ensure that I max out my Roth IRA each year, then look back at my 401k above my employer match. Let’s see how this would work:

  1. 401k – contribute 5% to get employer 75% match (or 3.75% of salary), which is about $330 per month.
  2. Roth IRA – contribute $790 for each of the remaining six months to reach maximum of $5,500 for 2015.
  3. Return to the 401k. My current savings rate into both accounts is about $1,150 per month; this new plan brings me to about $1,120. So I could pitch in only 1% more if I want be near the same savings amount.

The thought of only contributing 5-6% to my 401k is a little frightening! It makes me think of the days many years ago when I thought that was pretty good! HA! I am now so much wiser in the ways of my finances.

With this change, I’ll need to keep a close eye on my checking account balance to be sure the automatic transfer to my Roth hits at the right time. I could also consider setting up two monthly transfers to soften the blow. This will take more of my attention than the simplicity of the 401k, but I think it will be worth it. A big bright spot is that I like the fund choices in my Vanguard Roth IRA much better than those in my limited 401k, so it makes sense to fund up my VTSAX, baby!

(Image: stevendepolo)

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