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Dave Ramsey’s advice can make sense — but only for some investors.
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Investing for retirement is crucial to having a secure future. You’ll need money to supplement Social Security, which only replaces about 40% of your pre-retirement income.
But, exactly how should you invest enough to support yourself in your later years? Finance expert Dave Ramsey has provided some insight into what he believes is the optimum approach to growing your retirement account balance.
Here’s how Dave Ramsey thinks you should invest for retirement
Ramsey offered some simple advice to help you grow your retirement nest egg.
“If you have a traditional 401(k), the best way to help it grow at a steady pace is to invest up to your company’s match and invest the rest in a Roth IRA so that it can grow tax-free,” Ramsey advised. He also suggested putting 15% of your income away for retirement, with the money spread among your 401(k) and a Roth IRA at a brokerage firm.
A company match is provided by many employers that offer workplace 401(k) accounts. Essentially, this is free money your employer gives you when you contribute to a 401(k). You get to make contributions with pre-tax money, so during the year you invest, you save on your tax bill — to an extent. If you invested $5,000, for example, you could save up to $1,100 on your taxes if you were in the 22% tax bracket, so your contribution would effectively only cost you $3,900.
A Roth IRA, on the other hand, does not come with an upfront tax break. You get to claim your tax savings later. You don’t get to deduct your contribution when you make it, but you get to take tax-free withdrawals from the account. This is different from a traditional 401(k) because your 401(k) withdrawals are taxed at your ordinary income tax rate as a retiree.
Ramsey’s advice here is to first use the account providing the upfront tax break, only to get your employer match — then to opt for the account that gives you tax-free money as a retiree. He does say, however, that if your company offers a Roth 401(k), you can put all your retirement contributions into that account assuming it offers a good mix of investment options.
Should you follow Ramsey’s advice?
Ramsey is right that you should put money into a 401(k) to earn your employer match.
But whether you should invest in a Roth IRA over a 401(k) depends on your situation. If you think you will be in a higher tax bracket as a retiree, then deferring your tax savings until then makes sense. But if you expect your tax rate to decline, then a 401(k) might be a better option. A traditional IRA might be a good option if you want the upfront tax breaks but would prefer some of your money in a brokerage account that offers more investing options than a typical 401(k) does.
Think about your own tax situation when you decide whether Ramsey’s advice is worth following. No matter what kind of account you use, though, Ramsey is likely right that you should try to put away 15% of income for retirement and start working toward that goal ASAP if you aren’t saving that much already.
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