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I’ve been meaning to write a post with my general recommendations for retirement savings for a while now.  There are so many different retirement investment options out there, and it can all be very confusing when you’re first starting out. I know, I was there not too long ago.

This is the advice I would give to my closest friends & family. In fact, I just gave this very same advice to my father, who was trying to decide whether or not to open a Roth IRA.  Remember, you are never too young or too old to open a Roth IRA!

Here is the general order in which I prioritize funding your retirement accounts:

  1. Contribute up to the company match in your 401K, but no more. (If you have no company match, then go directly to step #2.)
  2. Max out your individual Roth IRA ($5K or $6K in 2010, depending on your age).
  3. After that, contribute as much as you can afford to your 401K, UNLESS your company 401K royally sucks. Some companies only offer funds that have really limited options, with actively managed funds and really high ERs. Then you might want to consider going to #4.  (You can contribute up to $16,500 in a 401K in 2010 per IRS regulations; an additional $5500 if you’re over 50)
  4. Once you’ve maxed out your other options, or if you have REALLY BAD 401K options, then you can invest in taxable accounts at an outside brokerage.

Keep in mind, I am not a financial planner, and these are just general guidelines that I have gleaned from my own research and personal experience. They do not apply to all situations.

For instance, if you KNOW WITHOUT A DOUBT that you will be in a lower tax bracket when you retire, then it makes more sense to max out your 401K first, and invest in a traditional IRA instead of a Roth IRA in step#2.  I don’t know too many people in this situation, however.

I also recommend that everyone seriously consider opening a Roth IRA if you haven’t already. Especially if you are in a lower tax bracket and/or don’t have the option of investing in a 401K!  

Just a few short years ago, I was a single graduate student in the 15% tax bracket. I was absolutely clueless about saving for retirement. My only income was my graduate stipend, so I could not invest in a company 401K. I thought I was screwed out of saving for retirement, and would be behind all my peers who chose to go straight to work out of school.  

It took me a few years to figure all this retirement stuff out, but I eventually opened a Roth IRA. Since I was in the lowest tax bracket, I knew for a fact that my tax rate was only going to increase in the years to come, due to inflation and increased earnings. It takes a lot of discipline (and frugality) to be making less than $30K/year and max out a Roth, but I did it, and I’m proud of it! 

I only wish someone had come to me back when I was an undergraduate, and told me the wisdom behind starting a Roth IRA early. Oh well — you live, you learn!

2 Responses to “Saving for Retirement: My Investment Strategy”

  1. tony says:

    No mention of Roth vs Traditional 401k?

  2. Heather says:

    That is an entirely different topic. With a complicated answer. I’ve been super engrossed reading about it for the past few hours, actually. My conclusion so far: For the vast majority of people (those not maxing out Roth 401K, which is ~90%), it’s better to choose traditional 401K over Roth 401K. Exceptions might be those that have good pensions, SS, annuities, expect substantially higher income, etc. This would bump them into a higher tax bracket during retirement, and would make pre-paying taxes more beneficial.

    For those that max out the 401K, the juries still out (see this post for example: http://thefinancebuff.com/2008/05/roth-401k-for-people-who-contribute-max.html), but it seems that it would be better to contribute to Roth 401k.

    So, for the majority, I’d say go with traditional 401K, for me and you, go with Roth 401K. That’s what I say today, anyway. I’m allowed to change my mind. ;)

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