A Simple Step-wise Approach to Retirement Savings

Attributed to http://401kcalculator.org

Now that we covered the ABCs of Retirement Plans, I want to share with you my simple step-wise approach to retirement savings.  This reflects my personal opinion and has not been endorsed by any third party.  As always, consult an appropriate financial professional before you make any personal finance decisions.

STEP 1:  If your employer offers an employer-sponsored plan such as a 401(k) AND matches contributions, put away up to the maximum matched in the 401(k).  Example: If you make $50,000 a year and your employer matches up to 4% of your income, then you should put up to 4% of $50,000 = $2,000 into the 401(k).  If your employer does not match contributions, start with STEP 2.

STEP 2: If you still have money to save after STEP 1 or if your employer-sponsored plan does not match, start a ROTH IRA and contribute up to the maximum allowed ($5,500/year, $6,500/year if you're over 50).

STEP 3: If you still have money to save after STEP 2, return to STEP 1 and max out your 401(k) contributions (currently up to $18,000/year).

STEP 4: If you still have money to save after STEP 3, first thing you should do is pat yourself on the back - you're a GREAT saver!  Then make sure you're signed up for a High-deductible Health Plan (HDHP) and start an Health Savings Account (HSA).  Current contribution limits are $3,350/year (single) or $6,650/year (family) with an extra $1,000/yr catch-up contribution allowed if you're over 55. 

  • The best benefit about HSAs is that unlike Flexible Spending Accounts (FSA), the funds roll over year to year if not spent.  The contributions are tax-deductible.  You can use funds at any time for qualified medical expenses and after age 65, you can treat it just like a 401(k) or IRA.

STEP 5: If you still got money left to save after STEP 4, which means you've already stashed away a minimum of $26,850 towards your retirement this year, YOU ARE MY HERO!  The next thing to consider would be a 529 College Savings Plan for your children if you have any.  Of course this isn't a retirement plan for yourself in the traditional sense.  But if your kids are college-educated, they are more likely to have a better-paying job - indirectly benefiting you in your retirement.  I will be making a separate post on 529 plans in the future so stay tuned.

To give you an idea of how much you would save if you followed the above steps: If you started saving $26,850/yr starting at age 30 earning 5% interest a year, by the time you hit age 65, you'll have $2,573,205.27 for your retirement, not including social security benefits.  The cherry on top - all of it is tax-advantaged!

References: see clickable links above.

Future Proof, MD

Dr. Bo Liu is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog.  He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money.  When he's not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.