How to prioritize savings choices

“…when we finally step across the threshold of retirement—our financial lives essentially shrink 

down into one perfectly binary issue: will our money outlive us, or will we outlive our money?” Nick Murray

401k plans and the like make saving for retirement as easy as typing a few keys at our computer. But will your 401k be enough? What if you want to save more – what’s the next step? You should consider the highest and best use for every dollar available. Because that may or may not include the maximum contribution to your 401k, here’s a blueprint for allocating the money you save for retirement.

401k and other retirement plans

  • Always contribute enough to get all matching dollars. Where else can you get an immediate 50% – 100% return on your investment?
  • Beyond your match, whether you add to your 401k depends upon:
    • Your tax bracket: do you need the deduction?
    • The choices in your 401k: can you choose from only a few funds? Are there several mutual fund companies participating? Do you have help structuring a balanced portfolio?
    • The cost of your 401k: what are the fees as compared to other 401k plans? BrightScope is the leading 401k/403b/457 plan research site. It’s worth your time to spend a few minutes investigating your 401k plan.

Savings options instead of your 401k

  • Roth IRA – if you qualify to contribute to a Roth, consider filling up this bucket.
  • Nondeductible IRA – contribute to a nondeductible IRA only when you own no pre-tax IRAs and make too much to contribute to a Roth IRA.
    • If that is the case, contribute to a ND-IRA then roll into a Roth IRA (a “back-door” Roth)
    • Otherwise, go to next step
  • Contribute to an after-tax (nondeductible) investment account before letting money grow in a nondeductible IRA. 11 Reasons You Need a Taxable Investment Account
  • Traditional (deductible) IRA – if you and/or your spouse has an employer retirement plan, this is usually not an option and I favor a Roth over a traditional IRA.

Backdoor savings – when budgeting, you may have higher priorities than saving a lot for retirement, especially in your early years. Contribute only enough to your 401k to get your match, then take care of these “details”:

  • Build up a liquid emergency fund, typically three to six months of living expenses
  • Cover your insurance bases: term life, disability, health, long-term care (starting in your 50s)
  • Pay off any debt with interest over 5% (just my rule of thumb)
  • Maintain at least 20% equity in your mortgage balance

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