In 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:
- 401k up to employer match
- Max out my Roth IRA ($5,500)
- 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?
- 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!
- 401k contributions are pre-tax and reduce my taxable income for the year, so my not go whole hog?!
- 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:
- 401k – contribute 5% to get employer 75% match (or 3.75% of salary), which is about $330 per month.
- Roth IRA – contribute $790 for each of the remaining six months to reach maximum of $5,500 for 2015.
- 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!