Saving for retirement is an important financial goal that everyone should prioritize. In this blog post, we will discuss a structure for saving for retirement that can benefit individuals of all ages. Instead of focusing on specific investments, we will concentrate on the types of accounts and saving strategies that should be focused on at different stages of life.

Level One:  Building a solid Foundation for Retirement:

Paying off high-interest Debt:

The first level is the foundation, which consists of three crucial investments or strategies. The first step is paying off high-interest debt. This is critical because high-interest debt, such as credit card debt, can quickly accumulate and impede wealth-building efforts. It is important to focus on paying off high-interest debt before investing in the stock market.

Creating an Emergency Fund:

The second step in the foundation is building an emergency fund. The general recommendation is to save three to six months’ worth of income in an emergency fund. This fund serves as a buffer in case of unexpected expenses or job loss.  While an emergency fund may not provide significant growth, it is a foundational component of building wealth.

Investing in yourself:

The third step in the foundation is investing in oneself. This involves developing valuable skills that can lead to higher income and job security. Investing in certifications or training programs that can result in an income bump is a smart investment. Growing income and savings rate is crucial for building wealth.

Level 2:  Making Smart Investment for your Future:

Moving on to level two, we have two common investments available to most people: a 401k and a health savings account (HSA).

Maximizing 401K Contribution up to Employer Match

The first investment to prioritize is contributing to a 401k up to the point that the employer matches the contribution. This is because the employer match provides an immediate 100% return on the contribution. Even if the 401k plan has higher fees or limited investment options, the match is often a good path forward.

Understanding the Benefits of a Health Saving Account (HSA):

The second investment in level two is an HSA.  An HSA offers unparalleled tax advantages, as contributions are tax-deductible and withdrawals for qualified healthcare expenses are tax-free. Contributing to an HSA can be a smart choice, especially considering that healthcare expenses are inevitable for most people. In retirement, an HSA can be treated like a regular individual retirement account if not used for healthcare expenses.

Level 3:  Explore Tax Advantage Accounts:

Level three includes three primary tax buckets: Roth IRAs, traditional IRAs, and taxable accounts. The choice of which account to prioritize depends on individual circumstances, particularly the current tax rate and expected tax rate in retirement.

Roth IRAs are beneficial for individuals in lower tax brackets, as contributions are made with after-tax dollars and withdrawals are tax-free. Traditional IRAs provide a tax deduction on contributions but are taxed upon withdrawal. Taxable accounts provide flexibility and liquidity but have fewer tax advantages. Maxing out a 401k is the next level. While it is generally recommended to focus on other investments before maxing out a 401k, when individuals are saving a significant amount of money, a 401k offers benefits such as higher contribution limits and potential early withdrawals.  Roth 401ks do not have income restrictions like Roth IRAs.

Level 4:  Tackling Low Interest Debt

Last and what we call level four is paying down low-interest rate debt. Not all debt is bad, and it may be financially unwise to pay off low-interest rate debt, such as a mortgage. Investing in the stock market can provide higher returns than the interest rate on low-interest rate debt. It is important to consider the odds and magnitude of coming out ahead when deciding whether to prioritize debt repayment or other investments.

In conclusion, this framework provides a clear path for saving for retirement in the most optimal way. It is important to prioritize paying down high-interest debt, building an emergency fund, and investing in oneself as the foundation. Individuals can focus on contributing to a 401k with a match, utilizing an HSA, and considering the tax benefits of different accounts. Individuals can maximize their 401k contributions and make informed decisions about paying down low-interest rate debt. By following this structure, individuals can effectively build wealth for retirement.

Feeling overwhelmed or uncertain about your financial future? Let Oxford Financial Planners guide you every step of the way. Reach out to us now for personalized advice and strategies tailored to your unique situation.