Baby Step 4: 15% of your income into retirement

December 14, 2006 at 10:27 pm Leave a comment

Most people, when you mention Dave Ramsey, they automatically think, “he’s that guy that hates debt” or “he’s that guy that cuts up credit cards.” While both are true, he’s also about building wealth. But, one of the reasons he is so passionate about debt is that he believes, and I do as well, that it robs your retirement potential. If you have debt, you’re more likely not able contribute to your 401(k) or Roth IRA like you want. So, yes, I believe debt robs people of the retirement they could have. But, what if you have no debt? No credit card debt, no student loans, no car payment, and you may even have your house paid off. What then? That’s where Baby Step 4 comes in.

Dave Ramsey’s baby steps are simple:
1- $1,000 in a baby emergency fund
2- Debt snowball
3- 3 to 6 months emergency fund
4- 15% of your income into retirement
5- College funding
6- Pay off the house early
7- Build wealth (and give a lot of it away)

So, if you’re sitting there with no debt and money in your pocket, you’d fall under Baby Step 4. It’s pretty simple actually, put 15% of your monthly income into some form of tax-sheltered retirement plan. The key here is “tax-sheltered.” Remember, there’s no point in building wealth if the government takes most of it away. There are ultimately two ways to do this:

One – company matched 401(k)
If you work for a company that offers a 401(k) program, contribute up to the match, i.e. my company matches up to 6%. You now have 9% to go. Max out your contributions into a Roth IRA (if you are eligible). For most people, these two will get you to the 15% mark. If not, go back to your 401(k).

Two – nonmatching 401(k)
If you work for a company that provides a 401(k) program, but doesn’t do a match. Start your contributions with a Roth IRA. Then go back to the 401(k) until your contributing 15% of your income.

Within the 401(k) and Roth IRA’s, Dave recommends the following mutual fund breakdown:
25% Growth
25% Growth and Income
25% Aggressive Growth
25% International

Look for funds that have over a 5 year track record (10-year is better) of 12% or higher yield.

Also, if you are a high income earner and don’t qualify for a Roth IRA or are limited to 401(k) contributions, use either low turnover mutual funds or a combination of low turnover mutual funds and variable annuities.


Entry filed under: Retirement, Saving and Investing.

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