Dear Dave,
I read where you recommend saving 15% of your income for retirement. Should I count my employer’s contribution to my retirement plan as part of that 15%?
Carlotta
Dear Carlotta,
That’s a great question. Employer contributions do not count toward the 15 percent I recommend setting aside for retirement. It’s great if you work for a company that offers perks like that, but I want you putting 15 percent of your money into retirement. Whatever your company matches, whatever its pension may be, or even havingamilitaryretirement package, none of that enters the equation. I want your money in your name.
Baby Step 4 of my plan says to put 15 percent of yourincomeintoretirement accounts. The first thing you should put money into is a matching retirement account. If you’ve got a 401(k), a Roth 401(k) or a 403(b) and your employer offers a match, you should do that up to the match before anything else.
Let’s say your employer will match three percent. Since the goal is 15 percent, that still leaves you with some work to do. You’ve got three percent of your own money already going into retirement, so then you could look at a Roth IRA. If the Roth, plus what you invested previously to get the match doesn’t equal 15 percent, then you could look at a 403(b), or go back to your 401(k) to hit the 15 percent mark.
And remember, if you’re going to reach your retirement goals, you can’t do it alone. King Solomon, one of the wisest men who ever lived, wrote: “Where there is no counsel, the people fall; But in the multitude of counselors there is safety” (Proverbs 11:14 NKJV). That’s why you need a quality financial advisor—one with the heart of a teacher—to help you navigate complicated financial issues, and guide you toward the kind of retirement you want.
Do you see what I’m saying here, Carlotta? I wantyou—notthecompany you work for—to control your financial destiny. I want you to be able to retire with dignity, and enjoy life after working hard and saving. The responsibility for making that happens falls to you!
—Dave
Dear Dave,
I’m currently on Baby Step 2, and I have about $7,000 in debt to pay off before I can move to bulking up my emergency fund in Baby Step 3. When you’re paying off debt, what do you recommend for 401(k) contributions?
Rae
Dear Rae,
I recommend putting a temporary stop to investing while you’re getting out of debt. Lots of people are shocked by this advice, and some disagree with it, because they’re afraid of missing out on their employer’s match or the wonders of compound interest. But before we go any further, let me emphasize one thing. The key word here is temporary. Baby Step 1 is to save $1,000 as a starter emergency fund. Baby Step 2 is paying off all of your debt, except for your home, from smallest to largest using the debt snowball plan. During this time you’re attacking your debt with incredible intensity, and putting every penny you can scrape together toward paying it off.
Working my plan, the average person can pay off all their debt, except for their home, in 18 to 24 months. Some folks can do it faster, and for some it takes a little longer. But during this time I want your financial focus to be on nothing but getting out of debt. Once that’s done, you’ll find you have a lot more control over your biggest wealth-building tool—your income.
Trying to accomplish too many things at once diminishes the ability to focus. And when you spend all your time nickel-anddiming everything, the result is that nothing at all gets done very well. You need to really move the needle and see results, because personal finance is 80 percent behavior and only 20 percent head knowledge. It’s not so much a math issue, because if you’d been doing the math all along you wouldn’t have a bunch of debt.
That’s why, for a short period of time, I want you to concentrate with laser intensity on knocking out debt. Once that’s out of the way, you can pour even more money into investing, saving and giving!
— Dave